If you are a business or an individual filing your taxes, there are a lot of loopholes and exceptions in the tax code, that can save you thousands of dollars (if not more) in taxes. The problem is that the IRS doesn’t make these tips known to you, or give them to you automatically. It is up to you to know, recognize, and take advantage of these tax benefits provided to you by the tax code.
Of course, taxation strategy will often depend on whether you are talking about filing as an individual, or as a business. Still, there are some basics that may help you understand how tax planning works.
What is Your Tax Bracket?
To understand what you can save in taxes with good tax planning, it’s important to understand your tax bracket. You probably knew that the more money you make, the higher percentage that you pay in taxes. But it’s not that simple. If you are in, say, a 35% tax bracket, you don’t just pay 35% of your total income. Rather, you will pay a smaller tax percentage for a smaller part of your income, and then higher tax percentages, at each amount or income bracket that you earn.
Additionally, you aren’t even taxed at 100% of what you earn or make because you get to use deductions, which lower your taxable income. Tax deductions reduce your taxable income. It’s like pretending you earned less than you did. But unlike a deduction, a tax credit actually lowers what your end tax bill is, on a dollar-for-dollar basis, which is an even bigger advantage.
That’s why it is so important to keep track of business-related expenses. That money can really add up, and lower what you pay in taxes.
There are loads of deductions or tax credits that you can get. Often, you can secure credits for things you wouldn’t even think about. These may include:
You can also use your W-4 to adjust your tax burden, and do some federal tax planning. For example, the more that is withheld in your regular paycheck, the less likely it is that you will have a tax bill to pay at the end of the year. Conversely, if you want more in your regular paycheck, you can make appropriate adjustments, knowing that there is a chance you could have a larger tax bill when it comes time to file.
Retirement accounts can be a huge tax benefit, because as a general rule, you are not taxed on money that goes straight from your employer or wages, into a retirement account. This may include 401(k) accounts, as well as traditional or Roth IRAs.
Call the Lincolnshire federal tax planning attorney at Orlowsky & Wilson, Ltd at 847-325-5559 to learn more about your taxes, and take advantage of tax laws that can help you.