Fundamental 5 Tax Strategies & Tax Filing Concepts to an effective Tax Planning and Filing, such as being aware of your taxable bracket, understanding the basics of taxation, maintaining necessary documents, etc., are all essential for effective planning.
Maximizing the potential for financial advantage while obeying laws is the objective of effective taxation planning. By analyzing and arranging a person’s fiscal position, it is possible to minimize liabilities and maximize deductions efficiently.
Filing taxes can be a daunting task, yet getting familiar with the relevant rules has its rewards. Understanding some of the major principles involved in taxation planning and strategy may help you lessen your financial burden once it’s time to file. Here are some points to consider before making any significant monetary decisions.
Tax Planning 1. Tax Deductions VS. Tax Credits
When filing your taxes, you may be delighted to learn about the deduction and credit options available. Both can reduce the money owed in taxes, though they function differently. By understanding the distinction between them, it is possible to develop a great plan to lessen your overall burden.
When filing taxes, taxpayers have the opportunity to deduct certain expenditures. These deductions are subtracted from your total taxable income, reducing the amount you will pay in taxes.
In comparison to deductions, which are subtracted from your taxable income, a much more valuable benefit is a reduction in the actual amount of taxes you owe.
Tax Planning 2. Stay Up To Date on Any New Tax Deductions and Tax Credits
It is critical to remain aware of the numerous tax deductions and credits that are available. In total, there are several hundred options, so it’s essential to make sure you qualify for the ones you plan on claiming.
Tax Planning 3. Know Which Tax Bracket you Fall Into
It’s only possible to make plans for the future by understanding your current tax situation. As such, the first advice is to determine which federal tax bracket applies to your case.
There are good reasons why. Once your total income is calculated, tax deductions are subtracted to determine your taxable income. Consequently, the amount of your salary or overall earnings may not always equal your taxable income. Instead of simply calculating taxes by multiplying your tax bracket by your taxable income, the government takes a different approach. They split your taxable income into sections and apply the applicable rate to each section.
In contrast to a flat tax system, taxpayers in America face a progressive taxation system. This means those who make more pay taxes at higher rates, while those who earn less are subject to lower tax rates.
For the upcoming 2023 tax year in April, 2024, income is split up into seven distinct brackets. The rates range from 10% to 37% in increments of two and four percentage points.
Tax Planning 4. Standard Tax Deduction VS. Itemizing Tax Deduction
Regarding tax planning, one of the most important decisions you must make is whether to itemize your deductions or simply take the standard deduction. This choice can have huge implications for how much you owe in taxes.
The standard deduction is a way to make filing taxes easier and faster. This no-questions-asked tax break is a flat amount that many taxpayers take instead of itemizing deductions to simplify the process. In essence, it is a fast and straightforward option for reducing one’s taxable income.
Each year, the amount of the standard deduction is set by the United States legislative branch, and it is usually adjusted to account for inflation. Whether you are filing singly or jointly, your eligibility for the standard deduction varies; you can see in which bracket you fall concerning this particular tax benefit through the table below.
Do you know why itemizing your taxes is important? By itemizing, rather than opting for the standard deduction, you can maximize your deductions on a tax return.
When tax planning, individuals should monitor their deductions throughout the year in order to determine whether itemizing is the best option. Usually, this choice hinges on whether the sum of their itemized deductions exceeds the standard deduction. Although itemizing can save money, it requires more effort and documentation than standard deductions. You must prove that you are eligible for any deductions taken when itemizing your taxes.
IRS Schedule A
When filing your taxes, Schedule A is the form used to list all itemized deductions. For those who own a home, there are advantages to itemizing that could result in more savings than the standard deduction would offer. Homeowners have access to tax deductions for mortgage interest and property taxes, which can quickly amount to more than what the standard deduction can provide.
For those who take the standard deduction on their federal tax returns, itemizing deductions for your state return may be worth considering. Fortunately, PriorTax provides Dedicated Tax Professionals for free with the ability to identify which tax deductions can be included and how their total amount compares to the standard deduction.
Tax Planning 5. Maintaining Prior Year Tax Records
When it comes to taxes, having records on hand is essential. Your tax return and the accompanying documentation should be kept secure in case of an audit. This is why it’s important to understand which documents are necessary for your taxation needs.
It is advisable to hang onto your records for at least three years due to the IRS’s time limit to carry out an audit on your return. Additionally, should you submit a claim for a tax credit or refund after filing your original return, those documents should also be kept for the same amount of time.
In certain situations, you may be required to maintain documents for an extended time, from six years to indefinitely. This is due to the Internal Revenue Service (IRS) having a longer limit on their auditing timeline in these cases. For example, the agency has up to six years when there was more than 25% income underreporting or seven years for writing off losses from worthless security. Furthermore, the IRS can audit indefinitely should they discover tax fraud or non-filing of any returns.