News

Tax Planning: Your Guide to Basics of Taxes and Tax Planning 

73Views

Individuals in Pompano Beach have to pay various local, state, and federal taxes depending on the nature and amount of their earnings. While you cannot evade filing taxes, there are certain ways that can help you save on taxes. 

If you don’t know how to optimize tax savings or don’t have enough time, hiring a Pompano Beach tax accountant can be the answer to all your tax problems. 

Understanding tax brackets, credits, and deductions

There are seven federal income tax brackets- 10%, 12%, 22%, 24%, 32%, 35%, and 37%. It is prudent to mention here that it’s highly unlikely for someone to pay the total rate of the tax bracket they belong to. This is due to the following reasons:

  • The government does not tax your entire income in one bracket. It’s divided into parts that belong to different income tax rates; hence, each part is taxed at the corresponding rate.
  • You can subtract tax deductions and credits to reduce your taxable income, which could make your taxable income less than your total income.
  • Tax deductions are the specified expenses you can subtract from your taxable income.
  • On the other hand, tax credits reduce your tax bill dollar for dollar.
  • For example, a $1000 tax deduction will reduce your taxable income by $1000, whereas a $1000 tax credit will reduce your tax bill by $1000.

Differentiating standard deductions and itemizing

Opting for a standard deduction or itemized deduction is another challenging and essential choice. Here’s how they differ from each other:

  • A standard tax deduction is a straightforward flat dollar deduction from your taxable income. It is subject to different limits depending on the type of filer—$14,600 for singles, $29,200 for married couples filing jointly, and $21,900 for heads of household.
  • Itemizing your tax return means taking all of your deductions individually.
  • The benefit of itemizing deductions is that they can surpass the standard deductions. However, itemizing may cause you to take longer to do the taxes.
  • While you do not have to prove your eligibility for a standard deduction, you must establish that you qualify for an itemized deduction.
  • You may itemize on your state tax return while you take the standard deduction on the federal tax return.

Basic tax optimization strategies

Here are some basic tax optimization strategies that individuals can employ to ensure that they’re able to save on taxes:

  • Contribute to a 401(K) account with an annual limit of $23,500 or $30,500 if you’re over 50.
  • You can put your money in a traditional or Roth IRA account. However, it is worth noting that contributions to a traditional IRA are tax-deductible, while those to a Roth IRA are not.
  • Open a 529 account, where you can invest up to $550,000 each year. But the catch is that contributions over $18,000 may accrue gift taxes.
  • Fund an FSA account that lets you put aside $3200, which is tax-deductible. 
Hailen Kazz
the authorHailen Kazz