A number of basic income tax tips can help you save money when tax time rolls around. It's also best to employ year-round strategies and consider the potential impact of raises and the alternative minimum tax (AMT) so that you aren't surprised in April. Preparation and good paperwork could mean the difference between paying a large chunk of money in April and receiving a hefty refund check. While we all need to pay our share, your goal at tax time should be to avoid paying more tax than you actually owe.
Income tax is a tax applied on the income you generate. It also applies to corporations or any sort of legal entity. Individuals are taxed on their total income with allowances for deductions. Whether or not you should file taxes depends on a variety of factors, including your citizenship status, gross income, age, filing status and whether anyone can claim you as a dependent. Basically, if you're not a dependent of someone else, such as your parents, you must file a tax return if you are under 65 and your gross income exceeds $8,750.
The important basic income tax tip is to pay attention to deductions. When claiming deductions, you can take the standard deduction or itemize your tax deductions. Many tax payers take the standard deduction rather then itemize their deductions, even though many of them could save a great deal of money by itemizing their deductions. It takes a little work to keep records of what you've spent, but it could be worth it.
You can take a variety of deductions when filing your tax return. First, you need to learn about deductions that you may qualify for in the coming year. You can claim deductions on your home mortgage interest, real estate taxes and property taxes. You can even claim deductions for home improvements and certain home repairs.
An often-overlooked deduction is for medical expenses. You can deduct the cost of medical expenses that exceed 7.5% of your gross income, which can include doctor and dentist fees, lab fees, contact lenses and glasses, prescriptions, medical supplies and the cost of your insurance premium if your employer does not pay for your coverage.
Tax payers often overlook charitable donations as well. You can deduct charitable donations, such as money donated to the Red Cross, religious organizations and other nonprofit entities. If you donate items like furniture, household items or clothing, you will need to determine the cash value of the donated items. However, make sure you use your head when calculating their value because you may have to defend that number to the IRS some day.
There are also a number of miscellaneous tax deductions, such as union dues, magazine subscriptions related to your employment, business liability insurance premiums, the cost of protective work wear and equipment, employment tools and supplies, the cost of continuing education classes, expenses related to seeking employment in your normal line of work and certain expenses related to computer and cell phone use to the extent such use coincides with self-employment.
Once you have an idea of what you can deduct, you need to start keeping track of all documentation related to the deductions you plan to make in the event the IRS decides to audit your return. If you keep good records throughout the year, you might save money and ease the tax preparation process.
The IRS website offers worksheets where you can plug in your income and any deductions you plan to take so you can get a good idea of what your tax liability might look like. Go to IRS website, play with the deductions and amounts and find the right balance.
Raises and the AMT
You might stumble on a few surprises as you prepare your tax return. If you received a raise during the course of the year and did not make any changes to your withholdings, you could find yourself owing more in taxes than you thought. Again, make use of the IRS website to determine if you are withholding enough taxes to cover your tax liability at the end of the year.
Another nasty surprise is the alternative minimum tax. The AMT is basically an extra tax that some lucky taxpayers have to pay on top of their regular income tax. The AMT originally evolved to prevent the very wealthy from using special tax benefits to pay little or often no tax. Unfortunately, however, the AMT limits have not kept up with income. It has reached far beyond the tax bracket it was intended to police and has hit a number of middle class families particularly hard. Since Congress has not yet addressed the problem, almost anyone can find themselves paying the AMT. The AMT provides an alternative number of rules for calculating your income tax in order to determine the minimum amount that someone with your income should pay. If the tax you normally pay falls below that number, you will have to make up the difference between your normal tax, which you have likely already paid, and the AMT.
Nearly 75 percent of Americans receive a tax return each year, with each return averaging nearly $2,500. That's a nice windfall for most of us but that doesn't mean you should run out and spend it like it's burning a hole in your pocket.
Use our checklist as a guide to help you gather necessary forms and receipts for preparing your income tax return.
Paying income tax on tips is easy when you work for wages and your employer is in charge of extracting the amount from your paycheck. When your work includes tips, things become a little murky. You are the one responsible for reporting the proper amount on your income tax information and paying the right amount of tax on tips.