Taxes: How Much Do You Really Know?

Handing your W2’s and 1099’s to your preparer might be the extent of your participation when it comes to income taxes. Having a general understanding of how taxes work can give you a new perspective on just how much of a share is owed to Uncle Sam.Join Matt Robison and I this week as we discuss the basics of taxes. Get a crash course on:Income: Wages (W2 or other), interest income capital gains and qualified dividends Adjusted Gross Income (AGI): Wages - above-the-line deductionsWhat are above-the-line deductions?: Contributions from HSA, contributions to traditional IRA, student loan interest (unless your income is too high), self-Employment costs (such as health insurance, retirement plan contributions, 50% of self-employment taxes), alimony, and certain education expenses 3. Taxable Income = AGI - standard or itemized deductionsStandard deduction ($12,950 Single, $25,900 Married, Filing Jointly (MFJ)Itemized Deductions:State, Local, Other TaxesMortgage and Investment Interest ExpenseCharitable GivingMedical Expenses (above a limit)More….4. Total Tax = Taxes on Taxable IncomeTaxes: Income tax, capital gains tax, AMT, NIIT, Medicare Surcharge, etc5. Payment or Refund: Total Tax - Credits - Taxes PaidCredits: Child Care Credit, Dependent Care Credit, Lifetime Learning Credit, etcTaxes Paid: From your paycheck or estimated tax paymentsWell, that’s as simple as I can make it in just 5 steps!AGI (step 2) is very important because that number gives you your tax bracket. But did you know that we have marginal tax brackets? If you’re like a lot of people, you probably think marginal means that if you are MFJ and your AGI is $150,000, you owe 22% in Federal Income Taxes, ($33,000) right? WRONG! The “marginal” means that for the first $20,550, you owe 10% in taxes. [$2,055]You then owe 12% on the next $63,000 (the next tax bracket) [$7,560]Then, 22% on the next $66,450 (the bracket you are in) [$14,619]That’s a total of: $2,055+$7,560+$14,619 = $24,234. Not $30,000 !It means a difference of almost $6,000 in your favorSo now you have your tax bill. Using the same example as above, you owe $24,234 in federal taxes. This is your total tax. Now come the credits (hopefully!). Credits differ from deductions in one major way, they are dollar for dollar. Deductions reduce your total tax bill by reducing your Taxable Income. Credits, on the other hand, come straight off your total tax bill. Some credits include the Child Tax Credit, Child & Dependent Care Credit, or the Lifetime Learning or American Opportunity Credit.Obviously credits are the way to go! Once you’ve deducted your credits, you then subtract any payments you’ve already made (withholdings or direct payments) and this will determine what you owe or are owed in the form of a refund. Learn more about Mike and my services at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/Are you ready to create your ideal lifestyle? Let’s Connect.