When it comes to understanding taxes most consumers are ready to go and see a tax professional and get them to look after their tax basics. While this might be the easiest way to handle your taxes if they are way too complicated and beyond your scope, consumers who have less complicated tax returns can actually benefit and save time by being a bit more tax-savvy. Understanding tax basics and your taxation liabilities better can help you make informed decisions and could help you save a lot of money over time. We will be discussing certain basic tax issues in this article:

Understanding Taxation: Basic Issues

1. Refunds: This has been an issue with tax payers over the years. At times certain consumers with the same gross earnings in the year could end up getting vastly different tax return amounts from the tax office at the end of the year in the form of a refund. While there could be several reasons for this, one main reason for this is that you could either be paying too much or too little in tax withheld each year. To simplify this for a better understanding of tax – you are basically paying too much; in essence you are giving the government an interest free loan and are reducing your net income which could have been used to meet other requirements. In the event that you are paying too little in tax withheld, you could be liable for an underpayment penalty. One of the important tax basics to understands is that you are either required to pay 90% of your current year’s tax liability to the government by the end of the year or 10% of the previous year’s liability, which ever is smaller.
2. Varying Tax Rates:This is an area where the consumers understanding of tax is limited. Consumers often feel that their income is taxed uniformly throughout. This is however, untrue. Different amounts are taxed at different rates. Put simply, the marginal tax rate for an individual is the tax bracket at which his/her highest portion of income is taxed.
3. Late Payments: Consumers, who file their taxes by the 15th of April but do not make their payments, could be up for a late payment penalty and is a very important tax basic issue worth knowing. The same is also true for consumers who file for an extension. Extensions only allow you to file your taxes after the due date, however you are still required to make your payments to the tax office by the 15th of April. If you have made a partial payment, you could still be liable for a late payment penalty on the rest.
4. Audits: Understanding tax is important to avoid being audited. One of the ways to reduce your chances of being audited is by ensuring that you complete your tax returns correctly and in full. Should you have any questions regarding your tax basics make sure you contact the tax office customer service team and ask them to walk you though any questions you may have. The tax office enforces penalties on incorrect or misleading information.
5. Estimated Taxes: Paying estimated taxes could be a good idea if you are self employed, are expecting a large sum from the sale of a capital item, feel that you do not have sufficient tax withheld to cover non wage related income or even a pensioner. Estimated taxes are due on the following dates: Jan 15, April 15, June 15 and September 15.
6. Determining Your AGI and Taxable Income: When understanding tax, it is important to understand your income as well. Your AGI or Adjusted Gross Income is your gross income minus any allowable or above the line deductions such as voluntary IRA contributions, child-support / alimony payments, heath savings account contributions etc. Once you have determined your AGI, the next step is determining your taxable income which is your AGI minus any exemptions and further deductions. It may be noteworthy that the lower your taxable income the lower your tax liability. Hence taking advantage on tax breaks is a great idea. In addition to this it may also interest consumers to know that credits are better than deductions for the simple reason that credits are a dollar for dollar reduction in the amount of taxes you owe. Simply put, if you have a $500 credit, that would mean that you owe $500 less in taxes.

These are certain basic and simple facts that are important to know about individuals’ taxes. These could help consumers become more tax-savvy and take advantage of tax beaks where applicable.

References:

1. Money Basics: Tax – CNN Money
2. Tax Basics – Bankrate