Income taxes are one of the topics of interest in the United States. However, so much misinformation exists that many prefer to leave all this work to their accountant and not get involved. Either way, do not worry. This article tells you everything you need to know about taxes in the United States.
What are Income Taxes?
Income taxes are those paid in the US for yearly income. Although some income is exempt from income taxes, most people are subject to them.
Do I Have to Pay Income Taxes?
If you work in the United States, you will most likely have to pay your federal taxes yearly. Although some states, such as Florida and Texas, do not impose income taxes, you may still be responsible for paying taxes to the federal government.
Depending on where you live, some cities and municipalities add another layer of income tax you must pay.
How Much Will I Pay in Income Tax?
The amount you must pay for federal, state, and local income taxes is determined by the amount you earn each year. The United States uses a progressive tax system, which means that the more money you make, the more you must pay in income taxes.
However, some factors can make you pay fewer taxes, such as your marital status (single, married couples filing a joint return, etc.).
If you work independently or own a small business, income taxes can be more complicated because you must handle everything alone.
Overworking means that, in some cases, you will have to pay taxes instead of receiving money for income taxes. You must also make estimated tax payments for each quarter to avoid penalties.
How to Pay Less Income Tax
There are several ways to reduce income taxes. The US government allows you to deduct certain items from your gross income or the amount you earn before taxes so that you can reduce the total amount of money subject to taxes. Some legal ways to pay less income tax are:
Payless Income Taxes: Exclusions
One of the ways to pay fewer income taxes is by taking advantage of items that do not appear on your tax returns. These are known as exclusions and do not add to your gross income.
For example, tax contributions to a retirement account sponsored by your workplace allow you to pay fewer income taxes. Another example is the interest received for municipal bonds (known as bonds), which are not added to your gross income.
Save on Income Taxes: Deductions
Another tool to save on income taxes is deductions. Some expenses, such as the interest you pay on some loans (such as a student loan or mortgage), operating expenses if you are a business owner, and specific contributions to retirement accounts can reduce the amount of income subject to income tax.
Most taxpayers are also eligible for other deductions, although the amount of money you can save varies depending on your marital status, type of employment, and financial situation.
These deductions are specified when filling out a 1040 form, including donations, work-related expenses, certain losses resulting from accidents, theft, etc. You can see more information about deductions on the official IRS website.
Payless Income Taxes: Credits and Deductions
In addition to deductions, some taxpayers are also eligible for tax credits. These are the reductions of the taxes owed. So, for example, if you end up owing $2,000 in taxes but are eligible for a $500 tax credit, your tax bill will go down to $1,500.
This differs from a $500 tax deduction, which would reduce the amount of your taxable income by $500.
Some of the most used credits include having children or dependents, buying a house for the first time, and some educational credits.
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