Actually, the IRS does a pretty fair job of explaining the tax code if you’re willing to spend days dissecting it. But if you aren’t inclined to do so, you may be in the dark on a few key concepts that could dramatically change the way you plan for taxes each year. With a little knowledge it’s possible to make your life a little less taxing.
- Your refund is nothing more than an interest free loan to the government. If you consider what the average refund of $1300 could do invested over time, you’ll realize how costly your refund really is. So stop loaning the government your money.
- Your income is taxed at different rates. Most people don’t realize that the first dollar they earn in a given year is taxed at the lowest tax rate, currently 15%. It’s not until your income reaches certain thresholds that it is taxed at the higher rates. Knowing the individual tax rates and when your income reaches the thresholds could enable you to put the plug on your income to keep if from incurring higher taxes.
- You don’t pay taxes on your earned income. Rather, you pay taxes on your adjusted gross income (AGI) which is your earned income, plus income from other sources less your deductions. So, you want to keep your eye on your AGI, not your earnings. Even if your earned income goes up, your AGI doesn’t have to. You can keep your AGI from increasing by finding more tax deductions or making a larger contribution to your retirement plan.