Hi, I’m Judy Copenbarger, and I’m here to help you tackle the very basics of income taxes so you can approach the coming tax season with more confidence.
From our very first jobs to wherever you might be in life right now, taxes never go away! They only seem to get more complicated. To make matters worse, the regulations and the laws about them are constantly changing.
So how can we possibly ever understand how to get ahead of them? Well, it starts with an education and a better understanding but it also takes me not boring your socks off so we’ll try to keep it light today. By the end of this article, I want you to have a solid understanding of what you should be thinking about when it comes to this year’s tax season.
What Is Federal Income Tax?
Today we’re talking about federal income tax. This is money that you pay to experience the benefits of living in this country and the services provided at the federal and sometimes state levels. So think of it as rent money. You’re taxed in many different ways such as the money that you make from working, the homes that you own, and the sales tax you pay at the grocery store. Sometimes you won’t have much control over how much you pay. Of course, you can vote, but once things are set for the year you’re expected to pay a certain amount of money based on how much money you make.
Adjusted Gross Income and Deductions
For most of your tax purposes, they will use what’s called your AGI or adjusted gross income. This is your annual income minus any specific deductions. Speaking of deductions, this is where you can save money by understanding your financial situation.
Itemized vs. Standard Deduction
You hear all the time that people just seem to write-off everything under the Sun, however, this isn’t always your best option.
The most simple way to optimize your tax return and pay less money is to choose correctly between the standard deduction and the itemized deduction options.
The standard deduction is a fixed dollar amount subtracted from your income before any tax is applied. The amount varies based on the tax bracket you fall in based on your total income during the previous tax year.
The alternative is an itemized deduction which is a detailed listing of all the eligible expenses you can deduct from your taxable income.
You want to choose the deduction that results in the greatest discount you can legally qualify for.
How To Choose The Right Deduction For You?
You’ll need to determine which option is better and just how exactly do you do that?
I’m glad you asked! I recommend using an online federal income tax calculator or the IRS tax calculator to determine how much you can expect to pay based on your situation. And you don’t have to wait until April to get a head start!
There are so many items you can deduct so consider itemizing this year if you own a business, pay a mortgage, or if you have large medical expenses or work-related expenses that aren’t being paid for by your employer.
Keep this in mind though, some of these deductions are subject to a 2% of AGI threshold which means if you made sixty thousand dollars a year they would need to be expenses of over $1,200 before you can write them off. Okay having fun? Eh, maybe not, but, we’re much closer to tax confidence than we were when we started.
What you need to know for this next year is whether you have the potential to save more money by deducting items individually than you would if you took the standard deduction.
From here we can go into some new territory on the topic of taxes. Looking for an article that’s a little more fun? It’ll have you dreaming of your financial future and it’s called: “How To Be Financially Independent“.
We’ve only just skimmed the surface of the tax world today so if you have tax topics that are on your mind comment below and then we can chat about it. Please subscribe to the newsletter if you’re enjoying the financial journey that we’re on and I’ll see you next time.
Until then, I’m Judy Copenbarger and God bless!
Judy Copenbarger is the Founder and President of Comprehensive Financial Services, based in Irvine, California.
She holds a Juris Doctor Degree, with a Taxation Emphasis, is FINRA Registered and maintains various Securities and Insurance Designations. Her professional expertise is in Estate Planning, Retirement and Education Planning.