A GUIDE TO YOUR PERSONAL INCOME TAX: BASICS
For many filing your personal income tax is one of the most frustrating things to do. However, by planning ahead and pacing yourself, doing your taxes would be a breeze. In this tutorial we will be learning all about personal income tax, the basic concepts, documentation, keeping records, actions to be taken before the year end, actions to be taken before the middle of the year filing, deductions, credits. filing mistakes, and making sure no surprises come your way when filing your tax. This tutorial will help you deal with your personal income tax so that you will be ready to file your taxes in a breeze.
Before going into the step by step things to do about your personal income tax, let’s first learn about the basics.
The Progressive Tax System
The United States of America employs the Progressive Tax System which basically means that larger tax is taken from people with higher income compared with those whose income is lower. Most people interpret this as the more you make, the higher your tax is, which is only a partial explanation of what the Progressive Tax System is. The most common misconception is that all your income get taxed at higher rates.
What actually happens is that the income of the taxpayer is taxed in ‘brackets’ or a hierarchy of blocks. This means the once your income fills the bracket, a new bracket must be used which means a new tax rate.
The importance of this information lies in the reduction of your taxes. This means you have the ability to time your income and expenses, if you have control over it, and push it to the year where you have the chance to be in a lower tax bracket. This also means that deductions might not be as severe as you initially thought in times when the taxpayer has little income, he or she may have the option to have their deductions be bumped to the lower bracket.
Tax Deduction and Tax Credit
A lot of taxpayers are confused by the concept of Tax Deduction and Tax Credit. It is important that these two be comprehended as it could mean the difference between a tax savings and more taxations.
A tax deduction is when an expense is deducted from the income of the taxpayer prior to the calculations while tax credit is the actual amount to be deducted once the tax has been calculated.
The Bottom Line
The Bottom Line is the net income of the taxpayer. The bottom line has already factored out the money owed by the taxpayer and the money owed to the taxpayer. To ensure that no surprise taxes come your way, it is essential that we understand the bottom line. What basically happens is that your income is deducted and the remaining amount is calculated against tax liabilities. The liability is then matched to the payments made by your payroll. If you were able to pay more than you owe then you have a refund otherwise you owe the IRS.
Essentially, keeping track of your expenses, income, and all the money that you manage is a great advantage so that you won’t be frustrated with your personal tax income. Examine your income and expenses so you will be ready whether you owe America or America owes you, it’s best to be prepared. Know if you are in debt so may get ready to settle it or if the IRS owes you so that you may be able to plan withholding for you to be able to use that money for other investments.
In the next tutorial we will be discussing the steps in keeping your documentation and records safe for easier filing of tax.