Whether you own a small business or work for someone else, one thing that’s a part of everyone’s financial plan is proper tax planning. The reason that tax planning is so important is that when done correctly, it can save you hundreds, and sometimes even thousands of dollars each year. In fact, with a little bit of knowledge and proper guidance, tax prep and filing can be streamlined and less stressful.
A Crucial Step to Tax Planning
In general, tax planning involves the analysis and arrangement of one’s financial situation. This is done to ideally maximize tax breaks and minimize tax liabilities. That said, one of the most crucial steps to proper tax planning is to know your tax rate. Figuring out this number will allow you to find various ways to save and to maximize those savings in the future.
What’s a Tax Bracket?
Typically, figuring out your tax rate means understanding your tax bracket. As you’re likely aware, people who fall into a higher tax bracket pay more in taxes, and those in a lower bracket are subject to lower tax rates. The good news here is that regardless of your tax bracket, most people normally don’t have to pay their designated rate on their entire income. Thanks to deductions and one’s taxable income being divided up into different chunks, and then each amount being taxed accordingly, most taxpayers don’t have to pay their initial tax rate on their entire income.
Making Sense of Tax Brackets
To make sense, then, of your respective tax bracket, you need to determine the rate for each chunk. To do this, first, look at the seven federal tax brackets applicable for a single person or a married person filing separately. These brackets range from 10 percent (up to $9,876) to 37 percent ($ 518,401 or more). You can figure out your tax rate by doing the math yourself, or you can click here and let the tax bracket calculator do the work for you.
Knowing Where to Start
When you get a better understanding of your taxable income, you can start the tax planning process. As briefly mentioned, people normally don’t pay tax on the entire amount of their income, thanks to deductions and credits that can be applied to reduce the amount of your income subjected to tax. Figuring out whether to take a standard deduction or to itemize is where proper tax planning comes in handy because depending on what you choose, you’ll notice a significant difference in your tax bill.
What’s more, there are hundreds of popular deductions and credits to consider that can further reduce the tax you’ll owe. Ultimately, working with a tax expert can ensure that you make the most out of any available deductions, itemizations, and credits available to you. But then, it definitely helps to figure out your potential tax rate today, so you can plan for the future.