How to Receive the Most Benefit From Personal Income Tax

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 There are a few main tips for receiving the most out of your tax return. By understanding all of your options, you can benefit as much as possible from personal income tax.

 

First and foremost, make sure to use all of your FSA dollars. FSA dollars are known as Flexible Spending Account dollars. These are funds that can be used for your retirement or 529 accounts. Certain states in the United States allow deductions for contributions to 529 accounts. There are certain limits placed upon the amount you can contribute to your retirement account. Each limit depends upon your age. The limits differ for each tax filing year. 

 

Another common way individuals leave money unclaimed is by not filling at all. If an individual is not required to file, they should still file regardless. If an employee makes less than a certain amount, they do not have to file. However, if they do file they are usually eligible for some type of return. The IRS estimated a total of 1.1 billion dollars go unclaimed from tax return annually from individuals who chose not to file. 

  

The next tip is to claim all deductions possible. This also includes charitable contributions. If you contributed to charity, you are edible for a refund. Some of the most common deductions are medical, charity, prepaid interest for homeowners (mortgages) and educational expenses. The deductions you claim are then deducted from your taxable income. Charitable donations in the form of both goods and cash are eligible for a deduction. It is important to keep organized records for all the donations you made. These will be needed when it comes to filing your taxes. Lastly, make sure that you are claiming a deduction from an organization that currently has a tax-exempt status

 

Lastly, nonrefundable tax credits can reduce the amount of tax you owe. Nonrefundable tax credits can help you ultimately owe less on your bill. For example, if you owe the government $1,000 and only paid $950, the nonrefundable tax credit will be applied to the bill. However, any remainder of your nonrefundable tax credit will not be given back to you, it will only be used to make up for the difference. Knowing the difference between nonrefundable tax credits and refundable tax credits is very important for maximizing your annual return. 

  

It is always important to adhere to all rules and regulations regarding taxes. It is not permissible to be misleading on your tax returns or use aggressive accounting. It is always better to stay on the safe side than take a risk with the IRS.

 

  •  Always report all income

It is very important to report all of your income to the IRS. In many cases failing to report all of your income is an honest mistake, however, the consequences are the same. You are responsible for reporting all of your income and checking it for accuracy. 

 

  •  File by the deadline

 It is also very important to file by the specified deadline. 

 

  •  Review your tax return for errors and mistakes

Reviewing your tax return for errors or spelling mistakes is important as it ensures your return is processed as quickly as possible. Errors will slow down the process for the IRS. 

The Ultimate Tax Guide: Personal Income Tax

The Dos and Don’ts of Personal Income Tax

personal income tax discussion
 
Personal income tax is a tax that is paid from an individual’s income. When an individual receives their paycheck, a certain amount of the paycheck is withheld for federal, state, local, Medicare and Social Security tax.

 

These are several types of taxes that are typically withheld. It is also important to remember that with each type of tax, the employee pays one half and the employer pays the over half to the government.

 

Federal Tax

Withheld federal tax is sent directly to the IRS on behalf of the employee. An employer will withhold this amount from the paycheck for each pay period. Federal tax can differ depending upon each individual. The main reason for this is due to the W-4 form. When employees are hired, they fill out a W-4 form. The W-4 form specifies information such as an employee’s filing status, the number of dependents they have, as well as other adjustments.

 
State Tax

Some states have a state income tax. Not every state in the United States has an income tax, however, some do. In the event the state you work in has an income tax, it is important to understand how it works. State income tax will also be based upon your state W-4 form. The W-4 form will indicate to your employer how much to withhold from your paycheck. If you happen to work in one state, and reside in another, there are a few options. In this scenario, the employee would owe taxes in two separate states. If this is the case, the employee should ask their employer to withhold taxes for the state they reside in as well as additional taxes for the state the work in.

 

Local Tax

Similar to state tax, local tax applies to a specific city. Not all cities have a local income tax. For example, local tax can apply to a certain school district. If you reside in a specific school district, you may have to pay local tax, even if you don’t work within the district.

 

Medicare Tax

Medicare tax is a type of tax that is withheld from every employee’s paycheck for current Medicare beneficiaries. Medicare tax is withheld at a rate of 1.45% of an employee’s gross income. Medicare tax does not have a limit, therefore all wages are subject to the tax, regardless of how much gross income is generated. Employers are required to withhold an additional 0.9% of Medicare tax on income greater than 200,000 annually.

 

Social Security Tax

Social security tax is a type of tax that applies to all employee’s paychecks. Social security tax benefits retired employees that earned a specific amount over 40 quarters. This allows employees to be eligible for social security benefits when they retire. Every employer is required to withhold 6.2% of an employee’s income for social security tax. The limit for this is $137,700 as of 2020. Employers also pay 6.2% of the social security tax.