In 2015, a total of 141.2 million American taxpayers reported earning $10.14 trillion in adjusted gross income and paid $1.45 trillion in individual income taxes. The data shows that individual income tax in the country continues to be progressive, with a huge chunk of the tax paid by higher-income earners. By law, every American whose gross income is more than $10,000 or earned over $400 from self-employment is required to file a federal income tax return.
This means that an individual who willfully commits tax fraud can be prosecuted and upon conviction serve a jail term. With the serious consequences that tax evasion and fraud attract, it is important to ensure you are tax compliant.
Get To Know Your Taxes and How to Deal With Them
Today, surveys indicate that the average American spends over $10,000 annually on federal, state, and local income taxes. This is why it is important to find effective ways to help you save more money while maintaining compliance. Taking the necessary steps will go a long way in ensuring you maximize your budget and help you avoid unexpected tax bills that can ruin your day. In order to do this, consumers should not only understand what taxes are but also the different types of taxes and how various tax tools can help them achieve better tax management. Here are a few tips to help you through the process.
What Is Tax?
Before consumers understand how taxation works and ways through which they can save more money from the process, they should begin by familiarizing themselves with what taxes are.
Simply put, a tax is a compulsory financial charge that is levied on individuals and corporations and enforced by a government entity. Taxes are usually imposed on the activities, expenditure, income, property, enjoyment, privilege, and occupation of the taxpayer. The funds raised through taxation are used to fund various public expenditures and government activities. In economics, taxes fall on the entity that pays the burden of the tax, whether it is a business or the end consumer of the business’ goods. Generally, a failure to pay as well as evasion of and resistance to taxation are punishable by law.
Know Your Taxes
While a good number of people think of taxes as a big headache, understanding taxes is not as difficult and will offer you numerous benefits. Understanding taxes will reduce the likelihood of making mistakes of ignorance. Knowledge of taxes and taxation will make it easier for you to know what records to keep, a factor that will help you determine what you can and cannot claim on your taxes. With proper tax management, you will be in a better position to get the most out of your refund, effectively reducing your tax burden.
As much as you may rely on tax tools and tax experts when handling your tax issues, understanding taxes will save you both time and money in the long run.
Different Types of taxes
The tax codes in various countries, including America, are quite complex. The good news is that taxes can be broken down into discrete categories, making it easy to understand and file taxes. In order to benefit from tax tips and save more money, you should be aware of the different types of taxes.
Just as the name implies, income taxes are levied on the income you ear. Generally, there are different tax rates for different income brackets, with top earners paying a higher tax rate on the money they have in the top bracket. However, it is important to note that anyone who earns more than the IRS-designated gross income limits must file a tax return. Some of the best ways to lower your tax bill include taking advantage of tax deductions and tax credits as well as investing in stocks and mutual funds. States such as Washington, Alaska, Nevada, and Florida do not levy state income tax on their residents but make up for it with higher excise taxes, property taxes, and sales taxes.
Excise taxes are included in the cost of taxable products, meaning that consumers will pay the taxes when they purchase specific goods. This also makes it very difficult to avoid this type of tax. In the event that the product you buy is subject to sales tax, you will end up paying tax on a tax. Some of the products on which excise tax is charged include tobacco, alcohol, and activities wagering and road use by trucks. While it may be difficult to avoid these taxes entirely, you can avoid buying products you are not interested in whenever possible.
Also known as consumption tax, this tax is levied on the money people spend. This means that the more you consume, the more you are taxed since the tax is calculated as a percentage of the sales price. Sales tax rates are set at the state level, one of the main reasons why the tax varies from state to state. Just like with excise tax, there are not so many ways to escape sales tax. One of the best ways to ease the burden would be to use the barter system, shop at garage sales, and make fewer purchases.
Perhaps one of the oldest forms of taxation, these taxes are paid on homes, land, and commercial real estate. The funds raised are channeled towards sewage treatment, drinking water, road maintenance, and schools. Before buying a home, you should take time to determine whether you will afford the property by keeping property taxes in mind. If you are to reduce the tax burden, you should be flexible about where you live. Since property taxes vary from state to state, you should do your homework before buying a property. In addition, be sure to claim your property taxes as an itemized deduction on the federal income tax return.
These taxes are paid after someone dies, from the net worth of the deceased. The taxes are on the privilege of passing on assets to heirs, meaning that they are paid by heirs as opposed to the estate of the deceased. The best way to minimize estate taxes is to involve a professional who will help structure the estate in such a way that it will be subject to very little tax.
This list is by no means exhaustive. There are many more types of taxes that are levied on individuals and corporations. If you are looking to save more money when paying taxes, through deductions and tax refunds, you should consider familiarizing yourself with the different types of taxes.
Tax Basics You Need to Know
While taxes do not make for an easy subject, it is true that knowledge is power. Grasping basic tax principles will help to take advantage of tax breaks and avoid tax trouble. These tax basics can also make it easy for consumers to strategize and save more money on their tax bill.
Over-Withholding Is Bad
As much as IRS says, a majority of taxpayers get refunds, getting a large refund repeatedly could be a sign of bad money management. When you have too much in taxes taken from your paycheck, you are effectively giving the government an interest-free loan. In order to reduce your tax bill, you should have a deeper understanding of the process of considering consulting a tax expert. This will leave you with extra money to invest, increase your 401(k) contributions or handle other matters.
Under-Withholding Is Bad
Just like having too much withheld in payroll taxes, going to the other extreme may not be a good move either. The American tax system is pay-as-you-earn, meaning that taxpayers are expected to remit taxes as they earn money throughout the year. In the event that you do not pay enough or do not pay as you earn income, there is a chance you will face interest charges and penalties for under-withholding.
Differentiate Your Income
Although most consumers consider their income to be one figure, tax authorities view it in distinct parts that help in calculating your tax bill. Everything of value that you get in a given year is called gross income. This covers alary, investment income, prizes and awards as well as the value of bartered goods and services. Once you have reduced this amount based on eligibility and depending on the tax form you file, you will arrive at the adjusted gross income or AGI. You will then arrive at your taxable income by deducting your personal exemption amounts and deductions from the AGI. Your tax liability will be based on your taxable income.
Different Dollars Have Different Rates
Once you know your taxable income, you should understand how much in taxes you have to pay. In the US, there are different tax rates, and the progressivity of the tax system means that taxpayers will have to pay more than one tax rate on their income. In order to avoid making mistakes and maximize savings, consumers should work with tax experts to understand how much this will cost them.
Itemizing Is Not Always Necessary
Filling out tax forms can be a tedious and frustrating exercise, a factor that pushes many people to file the easiest return they can. However, technology has made it possible to simplify the process by using tax tools. All you have to do is to look for the right tools to meet your needs and help you achieve your goals.
Why Do You Have to Pay Taxes?
By now, it is clear what taxes are and what funds raised through taxation are used for. Most consumers also know that tax evasion, failure to pay taxes, and resistance to taxation is punishable by law. However, every taxpayer should understand the importance of paying taxes if they are to file their tax returns and submit their taxes willingly. Indeed, it is possible to save more money from your tax bill while still maintaining compliance.
Social Welfare Pack
Over the years, taxes have been used to fund social welfare packages that mainly benefit the less privileged. Since social welfare and social security are a must in a sane society, it would be impossible to provide such services without taxation. Paying taxes faithfully provides the funds that the government uses to build health services, infrastructure, and other institutions that benefit humanity. By meeting your tax obligations, you will be playing an important part in helping to improve the living standards in society and laying a better foundation for future generations.
Taxes are the source of life for the nation. No government can sustain itself without taxes as it needs money to fund various programs. Paying taxes is a great way to show patriotism and facilitate government activities such as providing protection, social infrastructures, and building better roads and bridges.
Avoid Tax Back
Back taxes refer to a situation where we owe the government. While some people think of ways of cutting back on how much they owe the government, tax laws and relevant authorities can catch up with such consumers. Once you default on your tax duties, you may spend a lot of time and money resolving the issue. In some cases, you will be prosecuted and sentenced to jail time by a court of law. Paying taxes regularly and faithfully will go a long way in helping consumers avoid these troubles and frustrations.
As much as every taxpayer looks for ways to save more money when filing tax returns, you should try to do this through legal means. This will ensure you do your part and avoid getting into trouble with tax authorities.
Filing Tax Returns
Whether you are looking to file your own taxes or hire a professional preparer, organization will play an important role in ensuring a satisfactory process. Without proper organization, the process can be frustrating and time-consuming, characterized by mistakes and additional penalties. Here are a few tax management tips to help you avoid these troubles.
Collect the Relevant Income and Expense Information
When preparing to prepare and forward the relevant tax forms, you should ensure that you have the necessary information ready. This will include your personal information, income, personal expenses, and business information. Having such information will allow you to identify areas where you can save more money.
Review Tax Filings from Previous Years
Although changes from one tax year to the next are usually slight, keeping a record of tax filings from previous years will remind you of areas that are commonly overlooked. These may include dividends, interest, and infrequently used deductions.
Automate or Outsource Tax Calculation and Filing
As much as tax authorities strive to reduce the complexity and time associated with filing a tax return, it is still a daunting task. The good news is that there are several companies that offer tax tools to help you complete the task quickly and inexpensively. Another option would be to outsource tax calculation and filing services.
Do Your Research
Tax laws and interpretations are continually changing. In order to make the best decisions, it is important for taxpayers to stay as informed as possible. Since you will be looking to minimize your tax liability and keep your money, you should constantly be learning about income taxes.
Once you have all the information you need, you should consider filing your tax return as early as possible. This will help to prevent confusion and loss of data. Another reason to file early is that filing is inevitable and will have to be done at some point. Lastly, filing your return allows you to invest your refund as soon as possible.
Prepare for Next Year’s Tax Filing
Once you have filed your tax return for this year, you should start planning for next year. Making the necessary changes will go a long way in helping to reduce your tax liability in the upcoming year.
Best Practice Steps for Maintaining Tax Compliance
While you can rely on different tax tips to maintain compliance, it is necessary to keep in mind that change in tax legislation is constant. There are a number of steps that you can take to make sure you are tax compliant and that you also save more money.
You should always make sure that you are updated on the changing legal requirements. Failure to do this will see you being out of compliance within a short time.
Generally, taxation laws will be vague and subject to different interpretations. While experts can advise, they will refrain from taking responsibility for their decisions. This is why you should be aware of the consequences of your decisions.
Adjust Systems and Processes
Regardless of whether you have outsourced processes to a service provider or run your own technology, you will have to make some changes. This will be necessary in order to take into account any new legal requirements.
As much as having a compliant process is necessary, it is not sufficient. You will have to ensure that it works as expected, it is well-documented and that it demonstrates such compliance.
In the event that you are not running the systems and processes yourself, it would help if you look for audit and assurance frameworks to ensure everything works well.
While most tax processes may appear to be daunting and time-consuming, you are likely to get more accustomed if you do them often. In the end, proper tax management will not only ensure you save more money but also help you avoid getting into trouble with the law.
What To Do if You Have Additional Income
There are instances where you may have additional income from sources other than those that withhold federal income taxes. When this happens throughout the year, you may not know how to handle your tax obligations. Below are options available to you to help you save more money.
Various Options of Dealing With Additional Taxes
One of the best ways to ensure you meet your tax obligations is to pay estimated taxes. In most cases, you will need to pay the estimated taxes every three months. If you would like more information about this, the staff at the IRS will be happy to assist you.
Another option you can explore is to set up an emergency fund account for taxes. This is your own account where you set aside a portion of the money you earn from your big sale, contract labor, or freelance work. It is advisable to set aside a quarter of the income for taxes since this will make it easy to settle the difference as the deadline for filing returns approaches.
Taxpayers can also request their traditional employer to withhold additional taxes from their paycheck. This will require that you claim a lower number on your W-4 than the figure required by instructions or your calculations. Since the government will be happy to have more money upfront, this will not be an illicit or shady move.
In the same way that you would go to the doctor for medical help or consult a lawyer for legal guidance, you should not be afraid to get tax help from an expert. The fact that you will be able to save more money and manage your finances better should give you the motivation you need.
How to Save Money on Everyday Expenses
Since some types of taxes are levied on expenses and increase with expenditure, you may want to find ways to save more money on everyday expenses. By maximizing your budget, you will have some extra money left over at the end of every month, allowing you to add to your savings or reduce your debts.
Depending on how you relate with your neighbors, you can ask them to babysit your kids and offer to babysit theirs in exchange. You can either ask your friends to live close by or identify parents who are willing to do that to save some money.
Rather than calling a carpet cleaning service, you should consider hiring a carpet cleaning machine and doing the job yourself. This will save you a significant amount of money in the long run.
Rent-to-own services will generally cost more than 50 percent of the sales price of the product. If you are to save money, you should avoid this option whenever possible.
You may also want to consider buying forever stamps as opposed to new postage stamps that keep up with increasing fees.
In addition to finding ways to save money, you should also strive to get your finances on the right track. This will involve avoiding debt, optimizing tax withholding on your W-4 form, opening an online savings account, paying off credit card debt, and avoiding banking fees. You should also make a budget to help you keep track of your expenses and know how much taxes you have to pay this year. In the end, you will be able to save more money and do much more with your income.
Smart Ways to Save Money on Your Tax Bill
In today’s tough economic times, most people are looking for effective ways to save more money. With tax laws changing and becoming more complicated, taxpayers are wondering how this will affect their tax bill. The good news is that early tax planning can help you realize significant savings. Here's how to do it:
Adjust Paycheck Withholding
Adjusting your W-4 to optimize your tax withholding will help you save some money. The W-4 is a form that you give your employer, instructing them on how much tax to withhold from every paycheck. You should consider raising your withholding in case of a huge tax bill and reducing it if you got a huge refund.
If you are looking to shift deductions to the current year, you should think about consolidating deductions. For instance, making extra mortgage payments before the end of the year will give you a chance to claim an interest in tax that year. You can also prepay normally prepaid deduction expenses such as memberships to nonprofit organizations.
Contribute More to Retirement Funds
Generally, less taxable income will mean a lower tax bill. Since tax authorities will not tax money that is directly diverted to retirement funds, contributing more will be a great way to save some money.
Examine Current Investments
The relationship between investments and tax law can be complicated. This is why you should examine your investments to determine short-term and long-term capital gains. Be sure to use tax tools and remain proactive so as to reduce your tax liability and boost your refund.
Pay off Non-Qualifying Home Equity Loans
In the past, interest on home equity loans was deductible, allowing you to reduce your tax bill. However, things have changed over time. Today, deductions will only be allowed if the loan was taken out to buy, build, or improve the home. Since interest can be costly, you should find ways to pay off your home equity loan fast in order to save more money.
Paying taxes is not only a requirement under the law but also a duty that benefits the wider society. Since every taxpayer will have to fulfill their tax obligations at some point, the best thing would be to ensure proper tax management. Whether you handle your taxes on your own or outsource the services, use effective tax tips to make sure your approach helps you save more money.