When filing your annual tax return it is important that you know and understand what Taxable Income is and what non-taxable income is.
Taxable Income, in simple terms
Your Gross Pay (that\'s your total salary before any deductions are made) is split into 2 elements, taxable Income and non-taxable income. Non-taxable income is the determined by calculating your Personal Exemptions and Standard Deductions. Subtract the non-taxable figure from your Gross Pay, the figure you have left is your taxable income.
Your taxable income can also be influenced by using a Tax Deferred Retirement Investment Plan or by completing an Itemized Deduction.
What is Taxable Income used for?
Your Taxable income is used to calculate the amount of Federal Income Tax due and FICA elements like Medicare and Social Security deductions. The higher your taxable income, the greater the tax percentage so it is in your interest to keep your taxable income as low as possible, particularly as you receive pay rises and promotions.
How do I pay less Tax?
Keep an eye on your finances; look at where you spend your money. Here are ten tips to legally pay less tax
- Assess your non-taxable pay: Would you be better off completing an Itemised Deduction rather than a Standard Deduction?
- Higher Rate Tax Payer: Are you starting to pay higher rates on tax? Invest your earning into Tax Deferred Retirement plan. This will allow you to avoid paying higher rates of tax now and then withdraw from the Tax Deferred Retirement investment once you have stopped working. The Net impact meaning you save thousands of dollars in tax.
- Buy a Home. With house prices so high this is the number one way to pay less tax as interest is written off. Use the mortgage calculator to see how much interest you would pay per month.
- 401K: Set up a 401k and have part of your salary paid directly into it each payday. This directly reduces your Taxable Income and also provides a sum of money that you can access from 59.5 years of age. See the Tax Deferred Retirement guide for more information.
- Credit Card Debt: Did you know that the interest on your credits cards is not tax deductable? If there is sufficient equity in your home, re-mortgage and pay off the credit card debt. This is a big win as:
- You pay less interest on a mortgage than on Credit Cards
- You can claim the mortgage interest back on your annual tax return
- Get Educated: Taking a class, going to college can be a deduction. Amounts vary so do your homework. Statistically better qualified and educated people earn more than those who don't finish college or have fewer qualifications.
- Start a Business: You know that thing you really love to do? Well, make it pay for you. Turn your hobby into a business, you only need to make money 3 years out of 5, losses are then deductable. Get yourself some cards, a website and make that hobby work for you. As well as being tax deductable it can also open the way to a better life choice.
- Buy another House! You can claim deductions for 2 properties including loans and finance to maintain the properties.
- Look for Tax Credit initiatives: Solar Panels, Home Insulation... are there are efficiency programs that you can access to save you tax and reduce those monthly fuel bills.
- Give to Charity: Giving goods to charity is a good way of clearing the garage as well as saving some bucks.
You can calculate how Taxable Income affects your tax payments
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