13 basic tax lessons
| 2 | 3
Afraid that you'll just fritter
away the money if you actually get your hands
on it? Direct deposit your check and have
the amount that had been going to payroll
taxes automatically put into a savings account.
It'll be just like before, only now you'll
be getting interest on your earnings. Bankrate's
search pages can help you find the best
rates on money market accounts or certificates
You also could use your extra paycheck money
to increase your 401(k) contributions (do it while you're in your payroll office
changing your W-4) or set up automatic payments to your credit card accounts.
Underwithholding is bad
OK, you're persuaded that having too much
withheld in payroll taxes is bad. Well, going too far in the other direction is
not a good move either.
Our tax system is a pay-as-you-earn
one, meaning the IRS expects to get its money from you as you earn it regularly
throughout the year. When you don't pay up this way, you could face penalties
and interest charges for underwithholding.
As you did to correct
overwithholding, adjust the amount of taxes taken from your check to ensure that
you pay enough.
You also might need to fine-tune your workplace
W-4 if you have other income that's not subject to withholding. This could be
interest income, property that you sold for a profit or income from a part-time
cash-payment job. This extra withholding will help cover taxes on that money so that you don't have to come up with quarterly estimated tax payments.
Tips to differentiating your income
You might view your income as
one figure, but in the eyes of the IRS it has several incarnations, and each plays
a part in arriving at your ultimate tax bill.
You start with
your gross income, which is, basically, everything of value you got during the
year. This includes your salary, as well as investment income, any prizes or awards
you won, even the value of bartered goods or services you received.
you have that amount, you might be eligible, depending on which tax form you file,
to reduce it. You can find the most ways to cut your gross income at the bottom
of Page 1 of Form 1040, although the shorter 1040A also has a few.
you subtract as many of these allowable amounts as you can, you'll have your adjusted
gross income, or AGI. Your AGI is significant because it generally determines
whether you're eligible for additional tax breaks. If your AGI exceeds the specific
limit for a tax break, you can't claim it.
Finally there's your taxable income. You reduce your AGI further by subtracting your personal exemption amount and deductions, either standard or itemized. The result is your taxable income, the actual figure upon which your tax liability is based.
Different dollars have different rates
You've figured out your taxable
income. The next, and biggest, question is: How much in taxes will this amount
You already know that there are different tax
rates, currently six ranging from 10 percent to 35 percent. And you probably
say you're in, for example, the 25-percent tax bracket because your $50,000 salary
falls into the earnings rate covered by that rate.
|-- Updated: Feb. 13, 2009