The Amazing Benefit of Tax Deductions
Some people think that taking advantage of every single last tax deduction that is available to you is considered cheating on your taxes. It obviously isn’t considered cheating on your taxes if you are simply following the rules of the IRS. As long as you are doing everything by the book, there is no limit to how much you can save on your taxes before it becomes illegal. Just because you have a lot of stuff to write off or tax credits to take advantage of, does not mean that you are cheating on your taxes!
It is in your best interest to get a qualified accountant to sit down with you and help you prepare your taxes so that you can reduce your final tax bill at the end. Obviously, the more you deduct, the more you save on your taxes. But the great thing about finding deductions is that they come off the top of your income. The savings are going to be at the highest tax rate that you would pay. Let’s use an example:
Say that you made $100k this year, and, just as an example to make things simple, lets pretend that the tax rate on your first $80k is a flat 15%, and 40% on everything above 80k. So at the end of the year, you owe:
$80k * 15% = $12k
$20k * 40% = $8k
So you owe a total of 20k, and 40% of your total tax bill is on that last 20k that you made this year. So what if you investigate all your opportunities and you find out that you can deduct a total of 10k, or 10% of your total income for the year. You want to see what impact this is going to have on your tax bill, so you redo the calculation after you adjusted your income down by 10%.
$80k * 15% = $12k
$10k * 40% = $4k
So now you only owe 16k instead of 20k. You have reduced your gross taxable income by 10%, but you have reduced your total tax bill by 20%!
You can see the amazing benefit of tax deductions right there. Your deductions are coming off the top of your income, which is what you are paying the most taxes on. So it makes sense for you to max out any of your tax deferred accounts like retirement accounts, health savings accounts, etc. This savings will really help keep your money in your pocket.
Remember to run everything you are doing by a professional accountant. It is typically not worth doing all your taxes on your own. There is a lot of deductions you might miss, and a lot of stuff you might try to do that you aren’t supposed to. It is always good to save money on taxes, but it is never worth it if you are doing something illegal. Saying “I didn’t know I couldn’t do that” will not get you out of trouble.
Tags: Benefit Tax