Tax Brackets and Where You Fit
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Trying to learn about tax brackets may be beyond your scope of interest, but if you own a business, it behooves you to at least grasp the basics. U.S. tax codes are anything but stable, as every year brings new reforms and loopholes. Sometimes, the changes can affect how you do business directly. At other times, the information really won’t disturb you at all. To fully comprehend the significance of tax brackets, you need:
- An advanced degree in abstract comprehension, because reading IRS legalese is like deciphering ancient Cuneiform writing
- A really fine-tuned sense of “imaginary numbers,” since the IRS seems to use rotating numbers based on new and old rules
- A good tax CPA who can explain tax brackets in plain English and provide added value to your tax returns
In fact, it’s better not to try to learn about tax brackets at all! If you’re not IRS-literate, you can come to erroneous conclusions that don’t serve you or your small business at all. Your best bet is to trust your accountant to know the tax code and what’s best for your business. Still, here’s what you need to know.
Federal Taxes and Your Income
Federal tax brackets in 2016 ranged from 10 percent to 39.6 percent across seven different — progressively higher — levels. The bottom line, though, doesn’t stop there. It rarely does when it comes to the Internal Revenue Service.
Probably the most important number you need to know as a small business owner in metropolitan New York City is how many legitimate deductions and credits you can legally take when it comes time to file your income taxes. Pay attention to those deductions because:
- There’s a difference between gross income and taxable income
- Deductions often put you into a lower tax bracket
- Tax credits can bring you to an even lower bracket
- Certain deductions may work for you over many years
- Basic tax rates are based on your taxable income
State of Confusion
Once you think you can’t possibly learn about tax brackets any further, you face the brackets — or lack of same — in your state. Most states don’t follow the Federal government’s tax bracket scenarios. State income taxes, usually filed in tandem with your Federal taxes, can put another dent in your finances.
You can learn about tax brackets if your state has a progressive tax rate. Many states, however, impose a flat tax rate on all income. Still other states charge no income tax at all. If you happen to move during the year, you’ll need to learn about tax brackets in your new state through an entirely different set of rules and taxation regulations.
All You Need to Learn about Tax Brackets
For the most part, the more money you earn, the more money you pay in Federal and State income taxes. For the most part. The tax bracket you actually fit into is determined not so much by how much money you actually make, but how good you are at finding and using tax deductions.
You need a personal CPA — someone like Miller & Company, who monitors your financial decisions and provides advice on investments, spending schedules and business plans — to:
- Take advantage of your ability to move between tax brackets
- Lower your tax burden significantly without taking time to learn about tax brackets
It’s the credits and deductions you earn throughout the year that ultimately determine which tax bracket you end up in. If all you do is use an accountant to file your returns at the end of the year — then it’s too late to do anything about your tax bracket.
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