A lot of people are under the impression that tax planning is only for high-wealth individuals. However, like financial planning, just about everyone can benefit from some level of tax planning, whether that means becoming better acquainted with the various tax savings options available, or making proactive decisions based on your current financial situation. One of the best investments you can make is to visit with a financial or tax advisor to determine just where you may be able to save.
But before you make that visit, it's important to understand some tax basics. Here are just a few.
The IRS uses a progressive tax system, meaning that you will be taxed at different rates based on your income level, so the first $9,700 you earn will be taxed at 10%, while the next $9,701 to $39,475 will be taxed at 12%, with this progression continuing through to the 37% bracket. Understanding this will help you better understand your tax liability.
Standard deduction versus itemizing
If you always automatically take the standard deduction on your taxes, you may be leaving a lot of money on the table. This particularly deserves a second look if you're currently paying mortgage interest and property taxes on a home. You can also deduct any state taxes that you paid for the year. Another area to look at is medical expenses. If you have a lot of medical bills, you may be able to take a deduction on those bills, though the medical deduction is limited. Charitable giving is another area where you can take deductions for any contributions made to a designated charitable cause. A deduction is also available if you work from home. Chances are, once you look at these areas, you will still take the standard deduction, but it's certainly worth looking into before making that decision.
There are a lot of tax credits available
It's important to be aware of the various tax credits that are currently available to tax payers. These credits include:
- Adoption credit. If you've recently adopted a child, or are in the process of adopting a child, be sure to look into the Adoption Credit.
- American Opportunity Credit – Great for college students or their parents, depending your tax status. The credit can be up to $2,500 for joint filers with a modified adjusted gross income of $160,000 or less for joint filers, or $80,000 or less for single filers. If the student paid their own tuition, they can take the credit on their tax return.
- Child Tax Credit - The Child Tax Credit offers taxpayers up to $2,000 per dependent child who is 16 or younger at the end of the tax year. This can be particularly helpful for families with several children.
- Lifetime Learning Credit The maximum on this credit is $2,000 and can be claimed by tuition-paying parents, whether that tuition is for their children or for themselves. The credit can only be claimed if your modified adjusted gross income is $134,000 or less as a joint filer, or $67,000 as a single filer.
- Saver's Credit – As a way to boost saving for retirement, the IRS offers the Saver's Credit, which encourages lower income taxpayers to contribute to a retirement plan by giving them a credit. Joint filers earning less than $64,000 or $32,000 as an individual are eligible, with a credit of up to $1,000 available.
These are just a few of the credits available. There are also credits for the elderly and disabled, credits for low income earners, and energy savings credits for improvements made to your home that will save energy.
Learning about the various tax options that are available can go a long way towards mitigating your tax bill in the future.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.