fbpx
nextgen-logo

918.600.2229

info@nextgen.tax

6316 E 102nd St 2nd Floor, Tulsa, OK 74137

NextGen Tax Services | We exist to create and educate the NextGeneration of ultra-successful business owners.

Providing knowledge and expertise achieved through over 20 years’ accounting experience, Team NextGen is your partner in building your empire.

FOLLOW US

©2020 NEXTGEN TAX SERVICES, PLLC
EnglishEspañol
Mobile Logo
Top

Blog

Tax Planning for Beginners

April 16, 2021
Empires, Taxes

We here at NextGen know that financial understanding can be a bit difficult to grasp, especially if you were never taught how to manage your money properly. Not only do we want to help with our client’s financials, but we want to make sure these concepts are easy to grasp and easily applicable for them as well. For some, the concept of tax planning is foreign and unknown. Here at Nextgen, tax planning is one of our top services, putting our clients in the drivers’ seat when dealing with the IRS. The following information comes from NerdWallet, an app, and website dedicated to assisting their clientele with financial advice and making financial decisions. According to NerdWallet.com, here are some key tax planning and tax strategy concepts to understand before making your next money moves:

  • Tax Planning Starts with Understanding your Tax Bracket: The United States has a progressive tax system. That means people with higher taxable incomes are subject to higher tax rates, while people with lower taxable incomes are subject to lower tax rates. There are seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.

No matter which bracket you’re in, you probably won’t pay that rate on your entire income. There are two reasons:

  1. You get to subtract tax deductions to determine your taxable income (that’s why your taxable income usually isn’t the same as your salary or total income).
  2. You don’t just multiply your tax bracket by your taxable income. Instead, the government divides your taxable income into chunks and then taxes each chunk at the corresponding rate.

For example, let’s say you’re a single filer with $32,000 in taxable income. That puts you in the 12% tax bracket in 2020. But do you pay 12% on all $32,000? No. Actually, you pay only 10% on the first $9,875; you pay 12% on the rest. If you had $50,000 of taxable income, you’d pay 10% on that first $9,875 and 12% on the chunk of income between $9,876 and $40,125. And then you’d pay 22% on the rest because some of your $50,000 of taxable income fall into the 22% tax bracket.

  • The Difference Between Tax Deductions and Tax Credits: Tax deductions and tax credits may be the best part of preparing your tax return. Both reduce your tax bill, but in very different ways. Knowing the difference can create some very effective tax strategies that reduce your tax bill.
  1. Tax deductions are specific expenses you’ve incurred that you can subtract from your taxable income. They reduce how much of your income is subject to taxes.
  2. Tax credits are even better — they give you a dollar-for-dollar reduction in your tax bill. A tax credit valued at $1,000, for instance, lowers your tax bill by $1,000.
  • Taking the Standard Deduction vs. Itemizing: Deciding whether to itemize or take the standard deduction is a big part of tax planning because the choice can make a huge difference in your tax bill. Basically, standard deduction is a flat-dollar, no-questions-asked tax deduction. Taking the standard deduction makes tax prep go a lot faster, which is probably a big reason why many taxpayers do it instead of itemizing. Congress sets the amount of the standard deduction, and it’s typically adjusted every year for inflation. The standard deduction that you qualify for depends on your filing status.

Instead of taking the standard deduction, you can itemize your tax return, which means taking all the individual tax deductions that you qualify for, one by one. Generally, people itemize if their itemized deductions add up to more than the standard deduction. A key part of their tax planning is to track their deductions through the year. The drawback to itemizing is that it takes longer to do your taxes, and you have to be able to prove you qualified for your deductions.

  • Be Aware of Popular Tax Deductions and Credits: There are hundreds of possible deductions and credits out there, and they all have their own rules about who’s allowed to take them. Here are some big ones: Adoption Credit, American Opportunity Credit, Capital Loss Deduction, Charitable Contributions, Child and Dependent Care Credit, Child Tax Credit, Credit for the Elderly or the Disabled, and others.

  • Know What Tax Records to Keep: Keeping tax returns and the documents you used to complete them is critical if you’re ever audited. Typically, the IRS has three years to decide whether to audit your return, so keep your records for at least that long. You also should hang onto tax records for three years if you file a claim for a credit or refund after you filed your original return.

  • Tax Strategies to Shelter Income or Cut Your Tax Bill: Deductions and credits are a great way to cut your tax bill, but other tax planning strategies can help keep the IRS’ hands off your money. Here are some popular tax planning strategies:
    • Tweak your W-4: A W-4 tells your employer how much tax to withhold from your paycheck. Your employer remits that tax to the IRS on your behalf. Generally, the more allowances you claim on your W-4, the less money will be taken out of your pay to go toward taxes. Claim fewer allowances on your W-4, and more of your pay should appear on your check.
    • Put Money in a 401(k): Your employer might offer a 401(k) savings and investing plan that gives you a tax break on the money you set aside for retirement. The IRS doesn’t tax what you divert directly from your paycheck into a 401(k). In 2020 and 2021, you can funnel up to $19,500 per year into an account. If you’re 50 or older, you can contribute up to $26,000.
    • Put Money in an IRA: Outside of an employer-sponsored plan, there are two major types of individual retirement accounts: Roth IRAs and traditional IRAs. The tax advantage of a traditional IRA is that your contributions may be tax-deductible. How much you can deduct depends on whether a retirement plan covers you or your spouse at work and how much you make. You pay taxes when you take distributions in retirement (or make withdrawals before retirement). The tax advantage of a Roth IRA is that your withdrawals in retirement are not taxed. You pay the taxes upfront; your contributions are not tax-deductible.
    • Open a 529 Account: These savings accounts, operated by most states and some educational institutions, help people save for college. You can’t deduct contributions on your federal income taxes, but you might be able to on your state return if you’re putting money into your state’s 529 plan. There may be gift-tax consequences if your contributions plus any other gifts to a particular beneficiary exceed $15,000 in 2020.
    • Fund your Flexible Spending Account: If your employer offers a flexible spending account, take advantage of it to lower your tax bill. The IRS lets you funnel tax-free dollars directly from your paycheck into your FSA every year; the limit is $2,750 for 2020 and 2021. You’ll have to use the money during the calendar year for medical and dental expenses. Still, you can also use it for related everyday items such as bandages, pregnancy test kits, breast pumps, and acupuncture for yourself and your qualified dependents. You may lose what you don’t use, so take time to calculate your expected medical and dental expenses for the coming year. Some employers might let you carry over up to $550 to the next year.
    • Use Dependent Care Flexible Spending Accounts (DCFSA’s): This FSA with a twist is another handy way to reduce your tax bill — if your employer offers it. In 2021, the IRS will exclude up to $10,500 of your pay that you have your employer divert to a Dependent Care FSA account, which means you’ll avoid paying taxes on that money. That can be huge for parents because before- and after-school care, daycare, preschool, and day camps usually are allowed uses. Eldercare may be included, too. What’s covered can vary among employers, so check out your plan’s documents.
    • Maximize Health Savings Accounts (HSA’s): Health savings accounts are tax-exempt accounts you can use to pay medical expenses. Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, so long as you use them for qualified medical expenses. If you have self-only high-deductible health coverage, you can contribute up to $3,550 in 2020. If you have family high-deductible coverage, you can contribute up to $7,100. For 2021, the individual coverage contribution limit is $3,600, and the family coverage limit is $7,200. If you’re 55 or older, you can put an extra $1,000 in your HSA. Your employer may offer an HSA, but you can also start your own account at a bank or other financial institution.

NextGen holds the Tools for your Financial Success

NextGen wants to put you in the driver’s seat when it comes to the IRS. With our amazing team of tax strategists executing our clients’ best tax plan, you will feel supported, inspired, and uplifted. Your finances are our business, and we gladly accept any challenge that might spring our way. Let us help you pave a new path in your financial literacy and financial care. We’re here whenever you’re ready!

Credit: https://rb.gy/wk0rgw

Share