What Are the Basics of Tax Planning?

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You’re not the only one who thinks that tax rules are complicated. However, if you’re looking to shrink your tax bill, you’ll have to take some time to understand these rules so you can use them for your benefit. While you’re at it, you may also want to talk to a Pembroke Pines accounting firm to know more about tax planning.

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What is Tax Planning?

Minimizing tax liabilities and maximizing tax breaks requires proper analysis and arrangement of your financial situation. This is called tax planning. When done correctly, it allows you to efficiently and legally change the amount of money you’ll end up paying or getting back in the next tax season.

Key Tax Planning Concepts

Understand Your Tax Bracket

Unless you know what federal tax bracket you’re in, you won’t be able to make plans for the future. The seven federal tax income brackets include 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, you won’t likely pay the rate on your entire income regardless of which bracket you’re in.

Since our tax system is progressive, you’re subject to higher tax rates if you have higher taxable income and lower tax rates if you have lower taxable income due to the following reasons: 

  • Tax deductions may be subtracted from your taxable income.
  • Your taxable income is divided by the government into portions before they tax each portion at a specific rate.

Know the Difference Between Tax Deductions and Tax Credits

Although both tax deductions and tax credits reduce your tax burden, they do so in different ways. The best way for you to come up with effective tax strategies is to know the difference between both. While tax deductions refer to the specific expenses that can be subtracted from your taxable income, tax credits allow you to lower your tax bill dollar-for-dollar.

You’ll want to learn more about the popular tax deductions and credits out there. Each of them has its own set of rules about who’s qualified to take them.

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Looking for a Reliable Pembroke Pines Accounting Firm?

The team of accounting experts at TaxCPA1 is ready to provide high-quality service for what you want, need, and deserve. If you want to know more about our services, please feel free to contact us today.