What are the basics of individual income tax?
Compiled by Monica A. Lawver, CPA
Your income tax is calculated based on your taxable income. Taxable income is calculated as follows:
– Gross Income
– Standard Deduction or Itemized Deductions
– Additional Special Deductions
– Personal Exemptions
– Taxable Income
The tax is then calculated based on graduated tax rates. (The 2008 rates are are available at http://www.irs.gov/pub/irs-pdf/i1040tt.pdf.) Your refund or balance due is calculated as follows:
– Tax
– Credits
– Withholding and Payments
– Balance Due or Refund
You can decrease your tax liability by either decreasing your taxable income, or by qualifying for more tax credits.
How can I decrease my tax liability?
Standard deductions & itemized deductions. You can deduct either the standard deduction for your filing status (available at http://ty-llp.blogspot.com/2009/01/2008-standard-deductions.html), or itemize your deductions. If the total of your itemized deductions is close to the standard deduction, you may consider "bunching" your itemized deductions into alternating years, itemizing in the "bunched" years and taking the standard deduction in the alternat years. Common itemized deductions include state, local, and real estate taxes, mortgage interest, and charitable contributions.
Additional special deductions. Certain deductions are allowed in addition to the standard deduction or itemized deductions, such as alimony paid, the IRA (Individual Retirement Account) deduction, and the student loan interest deduction.
Personal exemptions. You are entitled to an exemption deduction for yourself, your spouse if filing jointly, and any dependents claimed on your return. For 2008, the exemption is $3,500 per person. This amount is decreased for higher-income taxpayers.
Credits. Credits reduce your tax dollar-for-dollar, so you want to be sure to take advantage of any available to you. Available credits include the child and dependent care credit, child tax credit, education credits (Hope and Lifetime Learning Credits), and first-time homebuyer credit.
The tax law is complex and always changing. If you want to be sure to take advantage of all the available deductions and credits, we encourage you to consult a tax professional. If you would like more information, or to discuss tax plannig opportunities, please contact us at ThomasYork. For frequently asked questions, you can visit our website at http://www.ty-llp.com/about_faq.html. For the most recent tax news, visit our blog at http://ty-llp.blogspot.com/.
| Required Circular 230 Disclosure: Any tax advice included in this written or electronic communication was not intended or written to be used, and cannot be used, by the taxpayer, for purposes of avoiding any penalties that may be imposed by governmental taxing authority or agency, or promoting, marketing or recommending to another party any transaction or matter contained herein. |
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