How much you pay in taxes — and you much you get back in a refund — is determined by many factors, including your tax bracket, the way you filled out paperwork when you started your job, how much you paid out of pocket for costs like medical expenses in 2016 and whether you're married.
It all comes together on your tax return. But to really understand why your tax bill might go up — and what to do to push it down — you need to know a few key words and phrases. Sure, people talk about "tax write-offs," but that can actually mean a lot of things: Do you know the difference between credits, exemptions and deductions?
Here are seven factors and terms you should know about — so you can get the most back at tax time. Expert tip: Tax credits are your friend.
1. "Adjusted Gross Income"
Income increases your tax bill. The more money you earn, the more taxable income you have. Adjusted gross income — or AGI — refers to your taxable income minus important "adjustments" you're allowed to take. AGI will affect how much tax you owe because it can change which deductions and credits you're eligible for. These can reduce the amount of taxable income you report on your tax return and the sum you owe at the end: You can deduct medical costs, for example, but only if they exceed 10% of your AGI.
The U.S. has a progressive income tax, which means that individuals are taxed at progressively higher rates as they make more money. But the IRS has set up marginal rates at which the highest dollar you earned is taxed: Tax brackets show, for example, that a person in the 28% bracket pays about $18,560 in tax plus 28% of any income over $91,150: not 28% of the whole amount of income.
Now, what is considered taxable and not taxable income can be a bit confusing. Luckily, the IRS has guidelines for everything from virtual currency to babysitting to bartering. While many factors affect how much you owe in taxes, your taxable income is the most powerful number on your return. The items below help to chip away at what you owe.
In addition to the U.S. having progressive income tax, our system is also "pay as you go." Withholding from a paycheck is the most common way that individuals pay taxes. The other way is through quarterly estimated tax, which is how freelancers and those who are self-employed usually pay.
For most workers, employers will withhold part of your income from each check and pay it directly, in your name, to the IRS. The amount your employer withholds depends on how you fill out your W-4, usually one of the first documents you fill out at a new job.
On it you let your employer and the IRS know what rate to withhold income at, that for single people or a lower rate for married people. You also specify withholding allowances, which are the number of exemptions (see below) you claim. The more you claim, the less of your paycheck will be withheld. Withholding more than you end up owing can result in a big refund. Withholding less means you might owe taxes when you file your return.
As nice as it is to get a big tax refund, withholding too much is basically giving the IRS an interest-free loan. Better to withhold less, take that money in your paycheck — and put it in a savings or investment account where it can grow.
TurboTax has a calculator to help you determine the power of withholdings to boost your refund or increase your take-home pay.
3. "Filing status"
Your filing status is your relationship status for the purposes of taxes, and determines your standard deduction, your eligibility for particular tax credits and your bracket. People who are married or widowed generally pay less tax than those who are single. But life — and relationships — is not always as clear as the tax forms would imply. Unmarried and have no kids? You file as a "single" individual. Same if you are divorced or legally separated according to state law. But if you are single and have a child that lives with you (for whom you pay at least half their expenses), then you could file as "head of household" and receive significant tax savings.
If you are married, you have the option to choose "married filing jointly" or "married filing separately." Generally, according to the IRS, you'll pay more in total filing separately than jointly, but it is usually worth it to run the numbers under both scenarios — taking into account state tax as well — to be sure you're filing under the status that will save you the most
If you're filing for the year you got married? According to the IRS, your status on the last day of the tax year determines your filing status for the whole year.
Life — particularly your relationship status — can be complicated. But you can be assured the IRS has seen everything: This IRS quiz will help you determine your status, at least as far as filing is concerned.
Deductions reduce the amount of taxes you owe. Taxpayers can take the standard deduction, a fixed amount determined by the IRS based on income, age, and filing status that changes each year. Or you can make itemized deductions, with line items for all costs that are deductible from your bill.
You can't take both: You'll need to make an estimate of your itemized deductions to see if they may be greater than the standardized deduction.
The standard deduction for 2016 is $6,300 if you are a single filer and $12,600 if you are married filing jointly. With itemized deductions you can reduce your tax bill, but your expenses during the year are not dollar-for-dollar. For example, if you are in the 15% tax bracket, every $1,000 in expenses will take only $150 off your tax bill.
Still, you might be glad to see just how many expenses are deductible: See Mic's list of surprising tax deductions here.
In order to figure out how much which deduction will benefit you, use the IRS's standard deduction quiz to determine your standard deduction. Then you can look at the list of acceptable itemized deductions in order to estimate how many you made use of in the past year.
There are some situations in which you would definitely benefit from itemizing your deductions: If you paid a lot in uninsured medical or dental expenses, paid interest or taxes on your home, paid large uninsured expenses on casualty or theft losses or made big donations to qualified charities.
Additionally, there are some taxpayers that are not allowed to take a standard deduction, like a married person filing separately whose spouse itemizes deductions. If your honey is itemizing, you have to as well.
Beware, high earners: Benefits from the itemized deductions are phased out if you earn over a certain amount. The phaseout begins at $259,400 for single filers and at $311,300 for married taxpayers filing jointly.
Exemptions reduce your taxable income. Similar to deductions, the amount you can take off is determined by the IRS and can vary from year to year. They represent a different type of expense. Unlike deductions, the amount of each exemption is the same, regardless of your filing status.
For tax year 2016, you may deduct $4,050 for each exemption you claim. There are two types of exemptions: Personal exemptions are granted to you and your spouse, and a dependency exemption is for children.
Although both exemptions allow you to deduct the same amount from your taxes, there are different rules for each kind. And no — no matter what emotional and financial drag you may feel from your spouse, the IRS points out, "Your spouse is never considered your dependent."
Your deadbeat roommate might be though: Here's why.
If you're single, you get one: $4,050. If you're entitled to two exemptions for 2016, you can deduct $8,100, but the benefit of some or all of your exemptions may fade if your adjusted gross income is above a certain amount.
For tax year 2016 the phaseout of exemptions begins at an adjusted gross income of $259,400 for single filers and at $311,300 for those who are married and filing jointly.
Adjustments are deductions you take to arrive at your adjusted gross income. The most common adjustment for younger taxpayers is the student loan interest payments. You can take off the interest you paid, up to $2,500.
Adjustments and deductions are very similar, but an important distinction is that — since adjustments are applied to your income to arrive at your AGI — it will reduce that number, rather than take away from that number after it is set.
This is important because many tax benefits, including many deductions, are phased out when your adjusted gross income reaches a certain level.
Those income levels are fairly high — $259,400 for single filers and at $311,300 for those who are married and filing jointly —but for those people, applying these adjustments first will push your adjusted gross income down, enabling you to take advantage of other benefits.
7. "Tax credits"
Like deductions, adjustments and exemptions tax credits reduce the amount tax you owe. But tax credits can have a bigger impact than the other perks because they are dollar-for-dollar reductions of what you owe, rather than reductions on your taxable income. That's a bigger bang for each buck.
For example, if you have a tax bill of $1,000 and qualify for a $600 tax credit, the tax you owe drops to $400. But if you had a $600 deduction, you might save as little as $60, after the benefit is filtered through your taxable income.
There are two types of credits, non-refundable and refundable. A non-refundable credit means you are refunded only up to the amount you owe. A refundable tax credit means you are refunded, even if it is more than you owe.
Tax credits are typically available for people with children, low incomes, seniors and the disabled, for low-income home owners and those who have adopted a special needs child. But there are many other credits you might qualify for, including ones covering education expenses and retirement saving. See the IRS's list here for more ways to save.
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