UNDERSTANDING THE IRS INDIVIDUAL INCOME TAX FRISCO TEXAS
The federal individual income that is administered by the Internal Revenue Service is undoubtedly the largest source of revenue for the federal government of the United States. Americans who are working are expected to file for tax returns with the IRS year after Year. Most people pay taxes in the form of payroll taxes. These payroll taxes are withheld from their paychecks. The individual taxesin the United States are calculated based on tax rates that range from 10% to 37%. When taxpayers claim deductions and credits, they reduce the amount of taxes that they owe. This reduces the tax burden imposed on them. United States personal income Taxdeclaration is basically divided into the following two steps:
The first step is to subtract your personal adjustment items from the Gross Incomes (your gross income is your total income). After the subtraction, the remaining amount is your adjusted gross income (AGI).
The second step is to deduct your deductions for which you qualify (this can be standard deductions or itemized deductions) from Adjusted Gross Income, the remaining amount is the taxable income. Your taxable income is always lower than your gross income since some income is being deducted from your total income to get the income that is taxable. Then, taxpayers can calculate the amount of income taxpayable based on the tax rate.
Note: The new Trump tax law plan has abolished the personal exemption and it is no longer applicable when you declare personal income for 2019 in 2020. Before 2018, taxpayers could make use of personal exemptions which lowered taxable income but the new tax plan signed by the United States President, Donald Trump eliminated the personal exemption in late 2017. However, taxpayers can still choose to itemize their deductions. This implies that they would subtract eligible expenses. Deductions could those for student loan interest payments, contribution to an IRA, health insurance contributions for self-employed people, etc. Common itemized deductions include:
Deduction for state and local taxes paid such as W2 salary withholding. Taxpayers can deduct up to $10,000 of any state or local property taxes.
Deduction for charitable contributions
Deduction for medical expenses exceeding 7.5% of AGI; This was originally 10% before the new tax plan came into place
Deduction for mortgage interest paid.
Deduction for various tax credits, such as child and family tax credits and education credits.
The final amount calculated is the tax owed, or the amount to be refunded by the IRS. The following details will explain the actual operation method in depth.
CALCULATION OF ADJUSTED GROSS INCOME (AGI)
Simply put, Adjusted Gross Income is an individual total gross income minus specific deductions. It is used to calculate taxable income of taxpayers. It’s just some deductions that reduce income including student loan interest, early withdrawal penalties, alimony, contributions and deposits in traditional individual retirement account (IRA) accounts, self-employed health insurance costs, Employer’s retirement plan, etc. In most cases, for some taxpayers, the AGI is more relevant than gross income. You can find your adjusted gross income on your IRS form 1040. The lower your adjusted gross income, the greater the deductions you can claim. If you make use of tax software, it would automatically calculate your adjusted gross income for you.
CALCULATION TAX
These deductions are deductions that lower taxpayer’s liability by lowering his taxable income. It can be divided into standard deductions and itemized deductions.
Note that taxpayers can only choose one of the deduction methods, not both. You can claim the deduction that lowers your tax bill the most.
Standard Deduction
This type of deduction is a fixed amount that reduces the income that taxpayers are being taxed on. Your standard deduction usually varies according to your filing status. Currently, the standard deduction for 2020 is:
For single people and married people filing separately, the amount is $12,400
For married people filing jointly and qualified widows or widowers, the amount is $24,800
For the head of household, the amount is $18,650
Your standard deduction can increase if you are 65 years or older, or if you have lost your sight. Currently, it increases by $1,650 for single people and heads of household. For married people and qualifying widows or widowers, it increases by $1,300. More than 90% of taxpayers claim standard deduction each year. Standard deductions are different each year.
Advantages of standard deduction
You can avoid keeping records and receipts of your expenses. This definitely helps if you are audited by the IRS.
You don’t need to itemize deductions such as medical expenses and charitable contributions.
It allows you to have a deduction even if you don’t have expenses that qualify for claiming itemized deductions.
ITEMIZE DEDUCTION
This type of deduction also reduces your adjusted gross income (AGI). For instance, if you are single and your AGI is $50,000, with itemized deductions of $14,000 your taxable income would be $36,000 but with the standard deduction, you could only reduce your AGI by $12,400 so your taxable income would have been $37,600.
Ways to benefit from itemizing your deductions:
ØYou must have had large medical and dental expenses.
ØYou must have large uninsured casualty (fire, flood, wind, losses from natural disasters) or theft losses.
ØYou must have had large unreimbursed miscellaneous expenses.
ØYou must have made large contributions to qualified charities.
ØYou must have paid mortgage interest and real estate taxes on your home.
How to choose what kind of deduction to declare
When the enumeration deduction of the taxpayer is higher than the standard deduction, or the taxpayer cannot use the standard deduction, and the enumeration deduction method is required, the enumeration deduction method is used for tax declaration.
CALCULATION OF FEDERAL TAX CREDIT
While adjustments and deductions apply to your income, tax credits however apply to your tax liability which is the tax amount you owe. For example, taxable income can be deducted from student loans, education expenses, IRA and other expenses, child support, elderly or disabled people, retirement savings, labor income tax (Earned Income Tax Credit), premium tax, etc.
If you have a tax liability of $2,000 based on the taxable income that you have gotten and your tax bracket, and you are also eligible for a tax credit of $300, your liability will be reduced to $1,700. This means you would only owe $1,700.
The most common federal income tax credits are:
Earned Income Tax Credit – This is a refundable credit for taxpayers and can be up to approximately $7,000 per year.
Child and Dependent Care Credit – This is a non-refundable credit of up to $3,000 (for a child) or $6,000 (for two or more children).
The American Opportunity Credit – This is a partially refundable credit of up to $2,500.
The Adoption Credit – This is a non-refundable credit related to the adoption of a child.
PHASE OUT
Phase Out refers to the depletion of a tax credit that a taxpayer is eligible for as their AGI approaches the upper limit to qualify for that credit. In the case of income tax declaration, each Tax Credit will set a Phase Out amount, meaning that when AGI reaches a certain threshold, the less Credit you can get.
