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Income Tax Deduction
Taxes have existed in the United States for all of its existence but they took on many forms prior to the modern income tax. The income tax was not finalized and permanently ensconced in the United States law until the 1910's. The tax rates, at its normal levels, have been adjusted upwards and downwards depending on the economic cycles with the most recently developments being the "Bush Tax Cuts" of the 2000's and the recent tax spikes under the Obama Administration. While income taxes affect some more than others, nearly all people are affected based on the assets/income they possess and earn as well as the familial structure they maintain.
Common Tax Deductions
As noted in the introduction, familial status and assets/income are far and away the biggest determinants on how much tax is paid, if any. Indeed, some people actually get money from the government and technically have a negative tax liability due to credits for things like children and mortgage loan interest payments. However, there is a general pattern that is usually reliazed, especially by anyone that has an income of any sort that is taxable. The United States federal income tax is progressive in nature. Meaning, people pay (or do not pay) taxes based on the income level, the types of income and so forth throughout the year. The tax is called progressive because people pay more as they enter one bracket after another. People under roughly $10,000 pay little to no tax as the first $10,000 or so is not taxed. However, people that earn more than that pay a higher percentage of tax for each "level" of income that they clear in a given year. People that are the highest earners, those well into six figures, pay up to 35% federal income tax (IRS, 2014).
Another basic to know about taxes is that what one pays is generally not completely linked to what is actually owed based on the tax year. Many people strive to have their paid taxes (withholding) align with their actual tax bill when they fill their 1040 tax return. However, many others overshoot and pay too much while others do not pay nearly enough. Many factors influence what is actually owed, with one of the major things being tax credits/deductions adjustments. Many of the common deductions will be covered and summarized throughout this report. As noted before, the credits that are taken and rate of taxes paid overall depend a lot on the source of the income, the family structure of the person paying the taxes, the age of the people involved and so forth. Laslty, there is a huge difference between a tax "deduction" and a tax "credit." A deduction is simply a reduction in taxable income and does not remotely tie out dollar for dollar between what would be owed without the deduction and what would be owed with the deduction. For example, if someone takes a $1,000 deduction, that simply means that they will owe taxes on $1,000 less income. If the overall tax rate was 10%, then the savings would be $100…not $1,000. However, a tax credit of $1,000 would be exactly that in terms of money credited to the employee…$1,000. The credit would be reduced from what is owed or added to the refund…whichever applies (IRS, 2014).
There are credits and deductions that are much more common than others. One example are the "Cafe 125" benefits that many to most employees take advantage of in one form or another, with the more common parts of such a plan being health insurance, dental insurance, disability insurance and so forth. There are situations and instances where the amounts deferred for these premiums are post-tax, meaning that tax must be paid on them, but they are pre-tax much of the time and are typically exempt from federal income as well as other taxes. Another very common deduction from pay that is often done on a pretax basis is 401(k) retirement plan deductions, as well as similar deductions such as 457(b), 403(b) and so on (. The exact type of retirement plan used depends on the corporate/organizational structure of the employer in question but the deductions can usually be either be taken pretax and/or post-tax, with the latter being called Roth. Which one an employee could or should take depends on a number of factors (IRS, 2014).
Another credit/deduction that is prolific is the child credit, whereby a parent can get a credit and/or deduction for a number of items related to childcare and child-raising such as daycare being paid for on a pretax basis, tax free (or tax-reduced) money being applied to savings accounts for educational costs later on and an overall credit for having the child present in the house as a dependent. In the case of a split set of parents who live apart, the deductions and credits are typically claimed by the custodial parent or shared if the arrangement is split (IRS, 2014).
Other common tax deductions at the federal level, in addition to the ones mentioned before, are flexible spending accounts and healthcare spending accounts. Both are for monies to be deferred on a pre-tax basis but can only be applied to healthcare costs. Flexible spending accounts, also known as FSA's, are used for regular healthcare plans while healthcare spending accounts, also known as HSA's, are used for people on high-deductible/catastrophic plans that are more for high-dollar procedures and issues and not for regular every-day doctor visits or prescription drugs. Given that HSA limits are much higher than FSA limits. The aforementioned childcare credits can encompass similar savings accounts known as "dependent care" savings accounts (IRS, 2014).
Yet a different but notable example of federal income tax deductions is the ability to deduct for is personal college experiences and courses. These deductions or credits often take one of two forms. The first is tuition reimbursement from the employer whereby the employer reimburses expenses paid by an employee up to an IRS limit of $5,250 on a pretax basis. In other words, an employee who also goes to college could get more than $5,000 in tuition and book expenses paid and they would not be required to pay any taxes on that money. An alternate, yet also beneficial form, of tax deductions or credit on taxes is the ability to have a percentage of tuition expenses being applied against one's tax bill (or added to their credit) through the Lifetime Learning Credit for the Hope Learning Scholarship, among others (IRS, 2014).
There are other deductions that are heavily used but are not nearly as common and prolific as the ones above. Examples include credits for payments made for personal property tax such as car registration fees, payments made to state and local income tax agencies, credits for real estate taxes, credits for tax preparation fees, home office expenses, a reimbursement or credit on money paid for moving for a job, the cost of purchasing or laundering work uniforms, charitable contributions to churches and charities or other non-profits and so on. Things get even finer and more rare when speaking of things like business losses due to theft, gifts for customers, equipment, equipment repairs, costs of goods sold, commissions paid, board meetings, banking fees, dining during business travel as well as other business expenses that were not reimbursed by an employer, consulting fees, legal fees and wages paid to family members (IRS, 2014).
The paperwork and backup needed for each deduction can vary a lot. For example, the Cafe 125 and retirement plan deferrals are often collected and reported by the employer and the employee does not usually need to do much beyond that except for reporting the figures accurately when taxes are filed. However, other tax deductions require documentation up front and/or it is very wise to have on file in case there is an audit or other verification request by the IRS or another agency. This documentation is often referred to as "substantiation." For example, someone claiming a credit on a car, house or income tax payment at the state or local level would certainly have a paper trail of what was invoiced by the relevant agency as well as proof of payment in the form of a cancelled check or money order. Other deductions such as childcare and medical reimbursement accounts would entail, if audited, proof of expenses incurred in the form of medical reports and invoices so as to prove what was paid, when and for what precise procedure or other medical expense. Mortgage insurance deductions would require proof of amortized interest, which is manifested in the form of monthly statement as well as annual statement which prove what interest was paid, in what amounts and for what property or properties (IRS, 2014).
However, it is often not necessary to list out and account for all of the above. Quite often, the amounts involved are not sufficient to surmount what is called the "standard deduction," which is the amount everyone…[continue]
"How To Limit Your Taxes" (2014, February 28) Retrieved December 4, 2016, from http://www.paperdue.com/essay/how-to-limit-your-taxes-184041
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