Tax Planning for Beginners
Taxable income is the portion of your income that is subject to income tax. This includes wages, salaries, tips, and other forms of compensation. However, not all income is taxable. For example, income from tax-exempt municipal bonds is not taxable. When calculating your taxable income, you can subtract certain deductions to reduce the amount of income subject to tax.
Tax deductions are expenses that can be subtracted from your taxable income. There are two types of tax deductions: standard deductions and itemized deductions. The standard deduction is a fixed amount that reduces your taxable income, and it varies depending on your filing status. Itemized deductions, on the other hand, are based on your actual expenses and can include things like mortgage interest, state and local taxes, and charitable donations. You can choose to take the standard deduction or itemize your deductions, but not both.
It's important to note that tax deductions are not the same as tax credits. Tax credits are a dollar-for-dollar reduction in the amount of tax you owe. For example, if you owe $5,000 in taxes and have a $1,000 tax credit, your tax bill will be reduced to $4,000.
Understanding taxable income and tax deductions is crucial for tax planning. By taking advantage of deductions and credits, you can reduce the amount of tax you owe and keep more of your hard-earned money.
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