What You Should Know About Tax

Taxes are seen as one of the most constant evils we encounter in our lives. If it is possible for many people, they will do without it but it is a necessity when cannot do without. More so, it is one of the most misconstrued concepts. However, if you learn the tips and how it works, you will realize that the processes are not as difficult as most people think. Do you have some puzzling questions about taxes, below are some of the answers and tips that might help you. 

–          You are obviously having a lot of withheld from your paycheck if you get big refund each year

This simply connotes that you are giving the government a loan free of interest.

–          You may be charged an underpayment penalty if you have too little withheld

It is important that you pay 90 percent of your tax for the tax year by the end of the year. You can also choose between this and the amount equivalent to 100 percent of your tax liability for the previous year. Choose anyone that is smaller.

–          You are not taxed at the same rate for every cent of your taxable income

Incomes and different kinds of finances are placed in different tax brackets and as a matter of fact, the various portions of your income may fall into different brackets and therefore have different tax rates. More so, you will realize that lower tax rates are placed on the first dollar you make than your last dollar. The tax bracket where the highest portion of your income is taxed is your marginal tax rate.

–          The amount of tax you will owe on income from investments is determined by your combined tax bracket

Combined bracket is calculated as the summation of your top or marginal federal tax rate and your top state income tax rate. You are allowed to deduct your state income tax on your federal return and hence the combined bracket may be less than the itemized deductions.

–          You may receive a late payment penalty if you file your return on April 15 but do not pay the tax you owe

This is also the true for those who file for an extension. The limitation of an extension is that it allows you to file your tax return after a stated date. However, you are required to make full payment by April 15. As a matter of fact, if you fail to make full payment and perhaps made part payment, you may be charged interest on the amount.

–          It is possible to reduce your chances of being audited

To effectively achieve this, you should ensure that your return is filled up completely, absolutely, correctly. Ensure that you do this on time every year.

–          If you are self employed, expect huge investment income or profit from a property sale, you should pay estimated taxes. However, you will owe a non-wage-related income if you do not have enough taxes withheld to cover the taxes you owe

If you have not chosen voluntary withholding on your pension or IRA payments as a retiree, you should consider paying estimated taxes. These taxes are due at four different times in the year. These include April 15, June 15, September 15 and January 15.

–          If deductable IRA contributions, alimony payments and some similar amounts are deducted from your total income, the result is adjusted gross income (AGI)

AGI is used in determining whether you are entitled for tax breaks or not. There is an AGI limit on every tax break and it varies with the type of tax break.

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