Understanding Your Income Taxes 101
Posted by TJ on Monday July 23, 2007 @ 04:04 PM
[Tags: taxes, guide, accounting]

Here is how your Taxes work out in a very summarized manner.

+ Income
Earnings from wages, dividends, interest, capital gains

- Less: The greater of the Standard or Itemized Deductions
Here's where you can deduct Medical, State Income and Property taxes, business expenses, and mortgage interest

- Less Dependency Exemptions (in 2006 this was $3,300 per dependant)

= Adjusted Gross Income (AGI)

X Tax rate

= Tax Liability

- Less Tax Credits (Foreign tax credit, Child and dependant care expenses, education credit, child tax credit)

- Less Withholdings during the year

= Total Due (refund)

This formula should help resolve a couple misconceptions about your income tax including:

Misconception #1 All tax deductions are a direct deduction of my tax liability - This is not the case. Most tax deductions are 'above the line' deductions which means they reduce the amount of income subject to tax. A tax credit only reduces the amount of tax you pay dollar-to-dollar.

Misconception #2 Tax refunds are a good thing - not necessarily. A tax refund is an interest-free loan to the goverment. A tax refund does not reduce the tax you pay during the year it only effects the time you pay it. If you owe money at the end the year, this means, that you did not withhold enough from your paychex during the year, if you get a refund you withheld too much taxes during the year. If you are good with savings, a refund means that you lost out on the interest that refund would of earned had it been in your bank account the whole year.

Disclaimer: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.

Reader Comments (Page 1 of 1) 1 |
Post a Comment:
Security Code Security Code:
Comments with offensive language will be automatically deleted within 24 hours.