Saturday, December 29, 2012

Basic Federal Tax Concepts and Terms

Below is some basic terminology that deals with basic federal income tax issues. A better understanding of these terms will help with the filing of a business tax return on a personal 1040 return.

Tax Income Exclusions – THINK SOURCE

A tax allowance takes the form of an exclusion if qualification for the allowance depends on the source of an economic benefit. To some extent, the more favorable treatment of exclusions may be explained by their lower visibility. Harder to track and report to the IRS.

Deductions- THINK USE

An allowance takes the form of a deduction if it depends solely on the use of the funds by the taxpayer. Deductions appear as entries on tax returns, while exclusions do not.  The higher visibility of deductions makes them more obvious targets than exclusions, when Congress is in the mood to impose limitations on tax benefits. Current tax deductions are currently in in flux.

Credits- THINK REFUND

A credit directly reduces tax liability, while a deduction or exclusion reduces tax liability only indirectly – by reducing taxable income. Unlike a one dollar deduction which reduces taxable income by one dollar, a one dollar credit reduces tax liability by one dollars. Credits, like exclusions, but unlike many deductions, are allowed regardless of whether one itemizes deductions or claims the standard deduction.  Because of this, you would prefer the credit to the even if your marginal tax rate was greater than 20 percent, if you claim the standard deduction. One of the most popular credits is the EITC. Learn about the 2015 EITC Earned Income tax credit to save money on your taxes. It may also be useful to check IRS Publication 596.

REMEMBER: The marginal rate is what matters for taxpayer decision making and planning strategies. You can apply the marginal rate by the amount of a deduction to see exactly how much money you don’t need to pay in taxes because of the deduction.

Information About Top Tax Deductions

1 comment:

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The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.