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Taxes Do Not Have to Be as Scary as You Think

It is not hard to tell when it is tax season in the U.S.  Typically slow tax advisors are busy with clients trying to figure out how much the government owes them, or how much they owe the government. The government is not out to ruin your financial life or audit you at the drop of a dime as many believe. As long as your tax return is filed by the deadline of April 15, your forms fully complete and honest, and any money you owe is paid on time, then you should not have to worry about the IRS auditing your tax return. If those conditions aren’t met, then you are setting yourself up for certain fees, penalties, and a possible federal audit. The same scenario can play out if you file for an extension and the terms of that extension are not fully met.

You may want to make annual adjustments to your tax with-holdings.  Those who are not getting enough taken out of their paychecks will end up paying for it at the end of the year.  Under law, you are supposed to pay 90% of your tax owing by the end of that year, or an amount equal to 100% of your tax liability for the previous year. If these conditions are not met, you could be charged an underpayment penalty.

For the self-employed, tax season can seem a little tougher. Self-employed people pay estimated taxes every quarter. This is also true if you are projecting large profits from an investment or real estate venture, or you cannot afford to cover the taxes that you might owe from a non-wage related income. Paying an estimate tax bill is the best way to protect yourself at the end of the fiscal year. Paying estimated taxes, is great for those who have retired and have not decided to part with voluntary withholding plans that are offered by pensions and IRA's. 

The amount that you owe in taxes is based on your taxable income. This is why it is a good idea to take advantage of any tax breaks to save yourself some money in the end. Before you can think about tax breaks,  you need to realize that not all of your money in your taxable income is taxed at the same rate. The money you make in the beginning of the year will receive a different tax rate and bracket than the money you make at the end of the year. Your marginal tax bracket will fall into the last or highest bracket during which your income has been taxed.

Your tax bracket is also determined by the amount of tax that you will owe from investments. Investments can include funds from CD's to funds generated through market funds. The bracket is the total of your marginal federal tax rate and your marginal state income tax rate. Sometimes this can be cushioned if you itemize deductions and deduct your state income tax on your federal return.

Tax deductions are not the only option for you when it comes to saving money on taxes.  A tax credit is matched dollar for dollar to the taxes that you’ll actually owe. You should take all the deductions that you can get, but they only reduce the taxes that you are supposed to owe by a percentage of every taxable dollar. If you really want to know the amount your deduction is worth, you can multiply your marginal tax rate by the amount of the deduction. By doing this, you can see that even if you’re in the 25% tax bracket, you are only going to be taking off a small amount from what you owe.

When it comes down to it, everyone has to pay taxes.  It is your civic duty to pay taxes, but it is your personal duty to make sure that you pay only what you owe.

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