Lots of people will sigh with bitter remembrance when you utter the name of the springtime curse: “taxes”. With the rate of federal income tax withholdings being pulled out of each paycheck – even without state, Social Security, or Medicare taxes to salt the wound – it’s not hard to understand why most consider annual taxes to be a burden; even making them feel used by the system.
It is certainly possible to combat the depressing season of tax time. You may find it helpful to remember that there are a number of tax deductions for which you may qualify based on tax regulations. These deductions prevent you from having to pay tax on specific economic benefits. Additionally, they may enable you to deduct certain income expenditures, or even directly from the cost of your tax bill.
Income Tax Deductions and Tax Credits
There are currently five items that can be considered ‘tax-advantaged’ because they get special treatment in domestic tax regulations:
1. Tax-free income is money you can obtain without worrying about tax concerns, now or in the future. Tax-free income could come in as tax exclusions or tax exemptions. In the majority of cases, the IRS doesn’t even need you to report these tax-free items.
2. What are capital gains? They are profits you may enjoy from selling or exchanging property that has been held for at least a year or more. These capital gains are generated in the long term only. These capital gains are subject to reduced taxes when compared to other types of income such as salary or income from interest. Similarly regular stock dividends and stock mutual funds attract taxes at lower rates.
3. Money that is taxed at a later time is called tax-deferred income. As time goes on, the income continues to increase without being reduced by the current tax rate; you should amass a larger amount at a later time. Please bear in mind, that sometime, this income will become taxable.
4. Tax deductions are payments or expenses that reduce your taxable income. There are two classes of deductions: “above the line” deductions are subtracted from gross income, and can only be claimed if you file an itemized statement rather than the standard deduction (which will be explained later).
5. Tax credits are items that you can use for offsetting your tax payments. This occurs in a dollar-for-dollar exchange. Often, though, you’ll need to fill out a specific tax sheet for every credit you claim.
These are easy ways to take care of your taxes while reducing the amount Uncle Sam gets each year.