Todays Futon

Our tax system would have a pretty hard time being more complex. If you are like most Americans, you hear terms like tax deductions, tax credit, adjusted gross income and you want to know more, but you never really do any research. It is not until you really need to know what a tax term means that you finally pay attention and figure it out. What if you found out that you may be paying more taxes because these terms? Would you want to know more? I thought so. Let’s start with the basics. A tax deduction is something that lowers your tax liability. In other words, a deduction allows you to take some amount of your income for the year and not have to pay taxes on it. If you paid taxes on 30% of your income, a deduction of $1000 saves you that 30% you qcfp would have paid or $300. Tax deductions are often confused with tax credits. A credit comes straight off of the taxes you pay. So rather than saving 30% of your money, you save 100% of that money. A tax deduction helps you lower your adjusted gross income. To define adjusted gross income, it is simply the amount of income you have after you have subtracted all of your deductions. Why does this matter? Your tax bracket is determined by your adjusted gross income and not your total income. The more deductions you have, the lower your adjusted gross income will be, and the lower tax bracket in which you will be. Tax brackets are important because the higher bracket you are in, the higher percentage of taxes you will pay. Let’s work through an example.