Many people aspire to be financially savvy and have a solid understanding of how they manage their money. No amount of savings accounts and Roth IRAs will help you if you don’t know about how taxes work. Tax planning is the key you need to unlock your true earnings potential.
If you don’t know anything about tax planning, don’t panic. We’ve compiled everything you need to know to get started. Read on to learn how to make effective tax plans!
1. Know Your Tax Bracket
In order to effectively manage your tax liability, it’s important to understand how tax brackets work. Depending upon your overall income, the United States government claims a certain percent of your income in taxes. The percentage is laid out in brackets based on a scale of possible income.
The tax brackets are progressive, meaning that each portion of your income is taxed at different rates depending on where it falls on the tax bracket. For example, if your overall taxable income is $50,000 per year, the first $9,875 is taxed at 10%, the income between $9,875 and $40,125 is taxed at 12%, and the income over $40,125 is taxed at 22%.
Many people reduce their taxable income by opening a tax-deferred retirement plan or making contributions to a flexible spending account in order to take advantage of lower tax brackets.
2. Credits and Deductions
Retirement plans and FSAs aren’t the only way to reduce your taxable income. You can also take advantage of tax credits and deductions.
Tax deductions are expenses that you’ve incurred that can be used to lower your overall taxable income. For example, if you earn $50,000 a year and claim $10,000 in deductions, then the total amount of taxable income is $40,000 and subject to a lower tax rate. For this reason, many people try to claim as many deductions as possible.
Tax credits are even better than deductions because they reduce your tax bill in total. If you have a $500 tax credit, then a $1,500 tax bill is brought down to $1,000.
3. Tax Planning for Small Business Owners
If you run your own business, then you need to know that tax planning for small businesses is a whole different ballgame. Things like changing the structure of your business, from a partnership to a limited liability company, can have an impact on how much you pay in taxes.
Savvy small business owners should take advantage of things like tax planning software to ensure that they’re reducing their tax liability as much as possible. The best thing you can do is hire a professional accountant to help you learn the ins and outs of taxes and small business.
Are You Ready to Get Serious About Tax Planning?
Most people think of tax planning as a tool used by the extremely wealthy and big corporations, but everyone can benefit from building tax plans. Once you nail down the basics of taxation, you can move on to more advanced material that’ll help you reduce your overall tax liability. Before you know it, you’ll be a tax pro!
Do you want to learn more ways to effectively manage your personal finances? You’ve come to the right place. Check out the rest of our blog for tons of info that’ll help you accomplish all of your financial goals!
