ONLINE ADVISOR ON TAXES
Basic tax questions
1. If you get a big refund each year, you're having too much withheld from your paycheck.
In effect, you're giving the government an interest-free loan.
2. If you have too little withheld, you may be charged an underpayment penalty.
You must pay 90% of what you owe for the tax year by the end of that year or an amount equal to 100% of your tax liability for the previous tax year, whichever is smaller.
3. Not every dollar of your taxable income is taxed at the same rate.
That's because portions of your earned income fall into different brackets, which are assigned different tax rates. Generally speaking, the first dollar you make will be taxed at a lower rate than your last dollar. Your marginal tax rate is the tax bracket at which the highest (or last) portion of your income is taxed.
4. Your combined tax bracket determines how much tax you'll owe on income from investments such as CDs and money market funds.
Your combined bracket is the sum of your top (or marginal) federal tax rate and your top state income tax rate. It may be less if you itemize deductions since you will be able to deduct your state income tax on your federal return.
5. If you file your return by April 15, but don't pay the tax you owe, you may receive a late payment penalty.
The same goes if you file for an extension. An extension only allows you to file your return after the due date. But full payment is still required by April 15. If you make a partial payment by then, you may be charged interest on the amount outstanding.
6. You can reduce your chances of being audited.
One of the best ways is to fill out your return completely, correctly, and on time every year.
7. You should pay estimated taxes if you're self-employed; expect hefty investment income or profits from a property sale; or if you don't have enough taxes withheld to cover the taxes you'll owe on non-wage-related income.
Retirees should also consider paying them if they haven't opted for voluntary withholding on their pension or IRA payments. Estimated taxes are due four times a year (April 15, June 15, Sept. 15, and Jan. 15).
8. Your adjusted gross income (AGI) is your total income minus certain "above the line" deductions such as deductible IRA contributions, alimony payments, or health savings account contributions.
Your AGI primarily determines whether or not you're eligible for tax breaks. Almost every break, be it a deduction, exemption, or a credit, has its own AGI limit.
9. Your taxable income is your AGI minus exemptions and deductions.
The less your taxable income, the less in taxes you'll owe. That's why it's in your best interest to take advantage of tax breaks where you can.
10. A credit is better than a deduction.
A credit is a dollar-for-dollar reduction of the taxes you owe. A $100 credit means you pay $100 less in taxes. A deduction reduces the taxes you owe by a percent of every dollar you're allowed to deduct.
You calculate the worth of your deduction by multiplying your marginal (or top) tax rate by the amount of the deduction. If you're in the 25% tax bracket, a $100 deduction means you'll pay $25 less in taxes (0.25 times $100).
Basic tax questions
1. If you get a big refund each year, you're having too much withheld from your paycheck.
In effect, you're giving the government an interest-free loan.
2. If you have too little withheld, you may be charged an underpayment penalty.
You must pay 90% of what you owe for the tax year by the end of that year or an amount equal to 100% of your tax liability for the previous tax year, whichever is smaller.
3. Not every dollar of your taxable income is taxed at the same rate.
That's because portions of your earned income fall into different brackets, which are assigned different tax rates. Generally speaking, the first dollar you make will be taxed at a lower rate than your last dollar. Your marginal tax rate is the tax bracket at which the highest (or last) portion of your income is taxed.
4. Your combined tax bracket determines how much tax you'll owe on income from investments such as CDs and money market funds.
Your combined bracket is the sum of your top (or marginal) federal tax rate and your top state income tax rate. It may be less if you itemize deductions since you will be able to deduct your state income tax on your federal return.
5. If you file your return by April 15, but don't pay the tax you owe, you may receive a late payment penalty.
The same goes if you file for an extension. An extension only allows you to file your return after the due date. But full payment is still required by April 15. If you make a partial payment by then, you may be charged interest on the amount outstanding.
6. You can reduce your chances of being audited.
One of the best ways is to fill out your return completely, correctly, and on time every year.
7. You should pay estimated taxes if you're self-employed; expect hefty investment income or profits from a property sale; or if you don't have enough taxes withheld to cover the taxes you'll owe on non-wage-related income.
Retirees should also consider paying them if they haven't opted for voluntary withholding on their pension or IRA payments. Estimated taxes are due four times a year (April 15, June 15, Sept. 15, and Jan. 15).
8. Your adjusted gross income (AGI) is your total income minus certain "above the line" deductions such as deductible IRA contributions, alimony payments, or health savings account contributions.
Your AGI primarily determines whether or not you're eligible for tax breaks. Almost every break, be it a deduction, exemption, or a credit, has its own AGI limit.
9. Your taxable income is your AGI minus exemptions and deductions.
The less your taxable income, the less in taxes you'll owe. That's why it's in your best interest to take advantage of tax breaks where you can.
10. A credit is better than a deduction.
A credit is a dollar-for-dollar reduction of the taxes you owe. A $100 credit means you pay $100 less in taxes. A deduction reduces the taxes you owe by a percent of every dollar you're allowed to deduct.
You calculate the worth of your deduction by multiplying your marginal (or top) tax rate by the amount of the deduction. If you're in the 25% tax bracket, a $100 deduction means you'll pay $25 less in taxes (0.25 times $100).
- You can choose to deduct sales taxes instead of local and state income taxes. If you're planning big ticket purchases (like a car or a boat), buy before year-end to beef up your deductible amount of sales tax.
- If you're a teacher, don't overlook the deduction for up to $250 for classroom supplies you purchase in 2011.
- Consider prepaying college tuition you'll owe for the first semester of 2012. This year you can deduct up to $4,000 for higher education expenses. Income limits apply.
- Max out your retirement plan contributions. You can set aside $5,000 in an IRA ($6,000 if you're 50 or older), $11,500 in a SIMPLE ($14,000 if you're 50 or older), or $16,500 in a 401(k) plan ($22,000 if you're 50 or older).
- Establish a pension plan for your small business. You may qualify for a tax credit of up to $500 in each of the plan's first three years.
- Need equipment for your business? Buy and place it in service by year-end to qualify for up to $500,000 of first-year expensing or 100% bonus depreciation.
- Review your investments and make your year-end sell decisions, whether to rebalance your portfolio at the lowest tax cost or to offset gains and losses.
- If you're charity-minded, consider giving appreciated stock that you've owned for over a year. You can generally deduct the fair market value and pay no capital gains tax on the appreciation.
- Another charitable possibility for those over 70½: Make a direct donation of up to $100,000 from your IRA to a charity. The donation counts as part of your required minimum distribution but isn't included in your taxable income.
- Install energy-saving improvements (such as insulation, doors, and windows) in your home, and you might qualify for a tax credit of up to $500.
