13 basic tax lessons
| 3 | 4
not every one of your $50,000 bills is taxed at 25 percent. The progressivity
of the tax system means you pay more than one tax rate on your income.
means the more you earn, the more you pay," says LeValley-Cocovinis. "You can
have a progressive flat rate and just start taxing at higher income levels. We
have brackets, so when you earn more income, the higher amount will be taxed at
The first portion of every individual's
earnings is taxed at the lowest, 10-percent, rate. The subsequent rates start
applying when your income hits a set level for your filing status. The tax rate
you pay on your last dollar, that 50,000th one in our example, is your marginal
tax rate, 25 percent in this case.
That's why you can't simply
say, "I made $50,000 and am in the 25-percent bracket, so I owe $12,500."
Remember the exemptions and deductions from lesson
No. 3 that will bring that dollar amount down to a lower taxable income level. And even if your taxable amount is $50,000, a look at the current tax table will show your bill on that amount actually is much less than your quick math calculation; you'll owe $8,850 instead of $12,500.
Itemizing isn't always necessary
There are several ways to get your
final tax bill as small as possible. The most common way is through deductions,
either the standard amount or itemized expenses.
are some tax breaks you can claim without having to itemize.
are found at the bottom of the first page of both the 1040A and 1040 forms. Technically,
they are adjustments to your income and are items you can claim to arrive at your
adjusted gross income discussed in lesson
Their popular name is above-the-line deductions,
because they are located on the forms just above the line (No. 37 on the 1040
and No. 21 on the 1040A) where you enter your adjusted gross income.
are found on the 1040A. About
a dozen can be claimed on
the 1040. Unlike some of the
deductions found on Schedule
A, you don't face thresholds,
such as the limits on itemized
medical or miscellaneous expenses.
You will, however, have to
complete some worksheets and
additional forms to claim
these breaks in most cases.
You can take any above-the-line deductions you
qualify for, regardless of whether you plan to claim the standard deduction or
itemize to get even more breaks. So take a few minutes to look over the 1040A
and 1040 forms to see if any of these breaks can help you.
Credits are better than deductions
Deductions get lots of attention,
but the tax code has something even better: credits.
helps reduce your amount of taxable income. A credit directly reduces your tax
Say you and your spouse use itemized deductions to get your taxable income to $45,000. When you file your joint return, you'll owe $5,951 to the IRS. You had a combined $4,000 withheld during the year, so you still owe $1,951.
But because you have a qualifying child, you can claim the $1,000 child tax credit. This will take your bill down to $951. And the amount you paid for care of your child while you both worked entitles you to a $600 credit. Thanks to these two credits, you only have to write a $351 check to the IRS.
who don't understand the difference between a credit and deduction sometimes choose
the tax break that offers the larger dollar amount. That could be a costly mistake.
|-- Updated: Feb. 13, 2009