Demystifying the whole tax situation is rarely fun. There are so many details to try and keep in mind and many small elements that can trip you up when it comes time to focus on your taxes.
Some terms that you might have come across during your attempts to make taxes make sense are “tax breaks” and “tax brackets.” Although this will be a shallow dive into these topics, it should cover the basics.
You’re always welcome to look for more information on the topic. And if you want additional details beyond your research, you’re always welcome to contact us here at Guardian Tax Law.
Tax Breaks
When you’re due to receive a tax break, that means the government is offering you a reduction in your taxes. A tax break can come in a variety of forms, such as claiming deductions or excluding income from your tax return.
Credits and Deductions
You can claim credits and deductions when you file your tax return. As with all things tax-related, you should only do this if you’re due for either of these relief options.
Here at Guardian Tax Law, we can help you decide which – if any – you might be applicable for, and we can help you look into claiming them going forward.
When you claim federal tax credits and deductions on your tax return, you can change the amount of tax you owe. (As mentioned, tax breaks will help you reduce how much tax you are due to pay.)
Deductions
Deductions can reduce the amount of your income before you calculate the tax you owe. Tax deductions reduce how much of your income is subject to taxes.
Credits
Credits can reduce the amount of tax you owe or increase your tax refund, and some credits may give you a refund even if you don’t owe any tax.
To spell it out a different way, tax credits have a direct impact on the amount of tax you owe. Credits reduce the amount of tax you owe, so you’ll end up with a dollar-for-dollar reduction of your tax liability.
Tax Brackets
Tax brackets show you the tax rate you will pay on each portion of your income. For example, if you are single, the lowest tax rate of 10% is applied to the first $9,950 of your income in 2021.
The next chunk of your income is then taxed at 12%, and so on, up to the top of your taxable income. Knowing which tax bracket you fall into will allow you to have a good idea of how much money you’ll have to pay back in taxes each year.
Try to keep an eye out on your earnings and your tax bracket so that you can have a good idea of what you’ll have to pay when it comes to Tax Day!
How Tax Brackets Work
Tax brackets result in a progressive tax system, in which taxation progressively increases as an individual’s income grows. Low incomes fall into tax brackets with relatively low-income tax rates, while higher earnings fall into brackets with higher rates.
Unless your income lands you in the lowest tax bracket, you are charged at multiple rates as your income rises, rather than just at the rate of the bracket into which you fall.
Having said that, the very rich have looked into loopholes and tend to exploit tax law loopholes and find creative ways to shelter earnings and assets. This tends to result in the wealthy paying less in taxes than the less well-off, depriving the government of revenue.
No matter your tax bracket, however, realize that it can all be very confusing, trying to navigate everything. That’s why, if you have any questions, you should reach out to us at Guardian Tax Law.
We’re more than happy to help you with your questions and concerns.
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