Frequently Asked Questions About Tax Planning

The primary federal income tax is a progressive tax on earned income (wages, salaries, tips) and unearned income (investments, dividends). Additionally, there are payroll taxes (Social Security and Medicare) on earned income, and self-employment taxes covering both income and Social Security contributions. Some states also have income taxes, so understanding your state’s tax code is essential.

Many deductions and credits can reduce your taxable income. Deductions like mortgage interest, charitable donations, and medical expenses lower your tax base. Credits, like the Earned Income Tax Credit and Child Tax Credit, directly reduce your tax owed. Consulting a tax professional can help identify relevant deductions and credits for your specific situation.

Self-employed individuals report business income and expenses on a separate Schedule C form attached to their tax return. You’ll be responsible for both income tax and self-employment tax. Keeping detailed records of all business income and expenses is crucial for accurate reporting.

When you sell an asset (like stocks or real estate) for more than you paid for it, you realize a capital gain. Conversely, selling for less results in a capital loss. Capital gains are taxed at different rates than ordinary income, with lower rates for long-term holdings. Capital losses can offset capital gains and even reduce your taxable income in some cases.

Yes, you can deduct a portion of the interest paid on qualified student loans. The deduction amount is capped, and your income level may affect eligibility. It’s important to understand the specific limitations and ensure your loans qualify before claiming this deduction.

The IRS offers options for taxpayers who can’t pay their full tax liability. These include payment plans, installment agreements, and offers in compromise (OICs). However, significant penalties and interest may accrue on unpaid taxes. Consulting a tax professional or the IRS directly can help you explore available options.

Even if your income is below the filing threshold, you may still want to file a tax return. Filing can entitle you to tax refunds for withheld income or credits like the Earned Income Tax Credit. Additionally, filing history establishes a record with the IRS, which can be beneficial in various situations.

The federal income tax deadline is typically April 15th of each year. However, extensions can be obtained by filing Form 4868, which grants an automatic six-month extension to file your return (though not to pay any taxes owed). State filing deadlines may differ, so always check with your state’s tax authority.

If your tax situation is complex, you have a business, or have significant investments, consulting a qualified tax professional is highly recommended. They can guide you through complex tax laws, optimize your deductions and credits, and ensure you’re filing accurately. Their expertise can save you money and minimize the risk of errors or penalties.