Tax time can be a frustrating experience. You work hard all year only to see that the difference between your gross pay and your take-home pay is larger than you would like it to be. As citizens and residents of the United States it is our communal responsibility to contribute to this great nation’s operational budget. Tax rates are set values based on income levels and other variables for populations at large. Once you have made your contribution, tax time is your opportunity to recalculate or “customize” your tax rate based upon your unique lifestyle. What does this mean?
It means that our government rewards you through credits and deductions when you make decisions to participate in activity that is beneficial to the community. For example, there are many tax benefits to purchasing a home because paid property tax funds are used to maintain the beauty and safety of that city and/or county. Ever wonder why some neighborhoods have cracked sidewalks and uneven streets while others do not? The answer; those rougher areas have significantly lower or unpaid property taxes.
Now that you know why you pay taxes, let’s focus on how to optimize your customized tax rate. The key to optimization is understanding how the activities you participated in during the year are presented on the income tax return resulting in a negative or positive influence in the rate. In our previous example of home ownership, the IRS allows the property taxes paid to be deducted from your taxable income to potentially lower your tax rate. This means that because you own a home AND pay your property taxes, you are positioned to pay less taxes than someone paying rent and making the same amount of income.
There is a two-step process to identifying income tax activity during the year. The first step is to get organized and gather all of your financial records. See previous blog article “Organizing Financial Records” for more detail. The second step is to review a checklist that will help you identify specific activities and gather the appropriate documentation. If you have activity but no documentation, ask your CPA or Tax Preparation Professional for assistance.
Download your copy of Dr. GNP’s Tax Organization Checklist as an example to help you get started:
Once all of your income tax activity is placed into the tax return, there will be one of three outcomes. 1) You overpaid and will receive a refund, 2) you paid the exact amount needed, or 3) you underpaid and must pay the balance. Paying taxes is everyone’s responsibility and you must contribute. If you need assistance organizing your financial records or preparing your income taxes, please contact Dr. GNP.
DR. GNP
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Thank you for information. I do have a question if we did donation of clothing is that worth entering that information in?
Donations are included as part of the itemized deduction calculation. The itemized deduction is accepted if it is larger than the standard deduction the IRS assigns. I encourage taxpayers to include everything just in case. Tax laws and calculations are constantly changing and you don’t want to miss out on any potential benefits!
This was another great article Titus II and Dr. GNP! Thank you for explaining this.
I have heard different views on paying extra taxes on purpose throughout the year. Is that something you would only recommend if someone is not a disciplined saver? What are your thoughts on that?
I don’t recommend utilizing the IRS as a savings facility. They are not set up for that and there is no financial benefit to the taxpayer. If you want to save, I highly recommend selecting a financial or investment product that will yield interest or dividends. Payroll deduction and auto transfers are good options for management. Taxpayers that wish to avoid owing during tax time will opt to pay more during the year. This can be done as a quarterly estimated tax payment or a decrease to the number of exemptions taken from your W-4 (federal) or G-4 (Georgia) employee forms. This is a personal choice by the taxpayer and should be discussed in detail with your CPA or Tax Preparation Professional.