Learn more about taxes and how you can save on your income taxes at this time…
It is important that you realize that there are ways that you can benefit from the tax code if you are a taxpayer in the United States and possibly its territories (and you file income taxes) that could mean more money in your pocket.
Even though you may be unable to use the large array of loopholes in the tax code that many millionaires and billionaires take advantage of, there are ways that you can benefit even if you have modest income.
In this discussion TheWealthIncreaser.com will discuss ways that you can possibly use adjustments, credits and deductions so that you can benefit yourself and your family so that you can build wealth more efficiently and achieve meaningful goals.
In the following paragraphs you will learn about adjustments that could possibly benefit you–along with credits and deductions that you can use to help make your desire to pay lower taxes actually come true!
Adjustments
If you contribute to an IRA (and you qualify) and/or you are a teacher and you have teacher expenses that you pay out of pocket, you can adjust your earned income by claiming an “adjustment to your income” which would have the effect of lowering your taxes and possibly increasing your refund amount or reducing the amount of taxes that you would pay if you were in the unfortunate position of “owing” on your taxes.
As a taxpayer you can possibly subtract certain expenses, payments, contributions, fees, etcetera from your total income. The adjustments (Schedule 1 Part II) would be subtracted from total income on Form 1040 and would help you establish your adjusted gross income (AGI) that goes on your 1040 tax return.
Common “adjustments to income” include such items as educator expenses, student loan interest, alimony payments or contributions to a retirement account–among others, and you can possibly take these adjustments even if you don’t “itemize” on your tax return.
Other Benefits You Must Know About
You must be able to tell if you can benefit more by claiming the standard deduction or the itemized deduction and you must know whether it is best to use the standard mileage rate or the actual expenses (in order to switch from standard mileage to actual expenses–you must use standard mileage rate in year 1) when claiming the use of your vehicle for your business or farm–at a minimum.
Because all tax situations are unique–your tax professional may be able to clue you in on “other areas of your tax position that you are unaware of” to see where and if there are other areas in the tax code that you could possibly benefit from.
You may be able to contribute to your company retirement plan and get a pre-tax benefit as well as an employer match–and you definitely want to know about that so that you could contribute at a level that is best for not only your current tax position but also at a level that allows you to meet or exceed your future goals so that you can do what you desire most during your retirement years.
If your income is at the right level, you may be able to qualify for a Retirement Savings Contributions Credit (a federal income tax credit designed to encourage low- and modest-income individuals to save more aggressively for retirement). The credit equals 10% to 50% of your contributions for the year, up to certain limits and is based on your income qualification.
Credits
There are many tax credits that are available, and it is important that you (or your tax professional) know of the “tax credits that may apply to your situation” and how they could possibly be of benefit to you and your family at tax time or possibly benefit you and your family in future tax years.
To name a few, energy credits, earned income credit, child tax credit, other dependent credit, childcare credit, clean vehicle credit for electric car purchases, savers credit and the home improvement credit, along with many others may be able to help you lower your taxes (technicalities must be met to qualify for many credits).
If you or your spouse are elderly and disabled you may be eligible for a credit–or if you anticipate future educational expenses, there are ways that you can use educational savings accounts such as 529 plans among others, that provide tax advantages at the federal, state and possibly local level, if utilized appropriately. In future years (when you utilize funds to pay for qualified educational expenses for yourself or your children) you may be able to take advantage of the American Opportunity Credit or Lifetime Learning Credit so that you can reduce the amount of taxes you owe–or increase the amount of your refund.
In addition, you (or your tax professional) want to be aware of what is possibly available at the state level as well, as in many cases “you will have to apply for the credit(s)” that are offered in a particular state.
Tax credits are more valuable than a tax deduction as you would have a dollar-for-dollar reduction (your tax credit would be $1,000 if you were eligible for a credit of $1,000 unless your taxes owed was below $1,000 and the credit was non-refundable, or you owed no taxes, and the credit was non-refundable) as opposed to the deduction being tied to your tax bracket.
If you are in the 22% tax bracket and you have a “$1,000 deduction” you would save $220–NOT $1,000 (.22 multiplied by $1,000) on your taxes–when computing your tax deduction.
Deductions
You can choose between a standard deduction (2022 amounts provided by the IRS) or an itemized deduction (includes medical expenses, state income or sales taxes, property taxes, mortgage interest, charitable contributions etcetera that you paid or contributed in 2022), depending on which one is most valuable to you from an overall perspective when you combine your federal and state taxes.
Deductions are not as valuable as a tax credit as a deduction will be based on your tax bracket–and “is not” dollar for dollar!
To reiterate to further enhance your understanding, if you are in the 22% tax bracket and you have a $1,000 deduction you would save $220 (.22 multiplied by $1,000) on your taxes. On the other hand, if you had a $1,000 credit you would save $1,000 on your taxes generally speaking–get the picture?
Conclusion
It is important that you realize that “effective tax planning” is a “year-round process” and you need to know the importance of why you must be able to distinguish between a tax credit and a tax deduction as by having the ability to distinguish between the two–you can make better tax and wealth building decisions.
In addition, be aware of how you can use tax shelters such as starting a business, utilizing rental property or investing in a tax efficient manner to possibly lower your taxes. You want to assess and identify what you potentially can (or need to do) do to plan your tax moves in a proactive manner in order to better predict your future outcomes–thereby reducing your risk of owing on your taxes or having other surprises at tax time.
Always be aware that some tax credits are refundable, and some are not!
On the other hand, a tax deduction or an adjustment to your income can still be of value as it helps lower your taxable income, which means you’re paying less in taxes overall. It can also increase your refund, but this depends on how big the deduction or adjustment is, what kind it is, your tax bracket, your income and your filing status.
A tax deduction (and/or adjustment) can only lower your taxable income and the tax rate (puts you in a lower tax bracket thus saving you additional dollars that you would be paying if you remained in the higher tax bracket) that is used to calculate your tax!
This can result in a larger refund of your “tax withholding” on your W-2, 1099-R, estimated tax payment(s) or other documents in which taxes were withheld.
A tax credit reduces your tax dollar-for-dollar–giving you a larger refund of your withholding, but certain tax credits can give you a refund even if you have no withholding (it is a refundable credit)!
Whether they go by adjustments, credits, deductions or any other name, the key point to remember is that if they can be of benefit to you at tax time–you want to know about them! Even though you don’t have to be a tax expert, you want to at least be aware of credits, deductions and other ways of sheltering income that are outlined in the tax code that can benefit you and your family when you decide to file your taxes.
All the best as you are now aware of the ABCD test, that you can use right now to analyze your taxes and make adjustments to benefit yourself and your family. You are now fully aware of why you need to know about how you can use credits and deductions so that you can avoid financial destruction and build a foundation of wealth building that cannot be shaken–because the knowledge that you now possess–cannot be taken!
You are now in a better position to achieve at a level that is your absolute best, thereby ensuring that your finances won’t be a mess–as you achieve unlimited success–because you have decided to master the ABCD test–and put “the procrastination of your past” to rest.
Return from Adjustments, Benefits, Credits, Deductions & Your Taxes to Tax Basics
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