the tax deadline cometh.
As the tax filing deadline draws ever nearer, our office has been fielding a lot of tax-related questions and requests: “What are ‘unrecovered contributions’?” “How many exemptions can I claim?” “The dog ate my 1099.”
Indeed, it’s a special time of year.
All joking aside, tax preparation is an important way for individuals and their families to develop a deeper understanding of their unique circumstances and the various ways in which our governing authorities help us “render unto Caesar what is Caesar’s.” Here are a few items to pay attention to:
Marginal Tax Rate. In the U.S., federal income tax is calculated progressively, therefore your marginal tax rate is calculated by applying a percentage of tax to your income for each tax bracket in which you qualify. Understanding the potential tax consequences/benefits of additional income or deductions can help you make more strategic decisions when it comes to tracking deductible expenses and contributing to tax-deferred accounts, like your 401(k), HSA, or IRAs, as these tax rates are applied after any exemptions and/or deductions have been subtracted.
Adjusted Gross Income. Your AGI is the starting point in determining different tax thresholds, whether you qualify for particular tax credits, and whether you can deduct any medical expenses incurred during the year. Your adjusted gross income is your total income minus certain allowable deductions, including: contributions to 401(k)s and IRAs; interest on student loans; alimony payments; retirement and health insurance-related expenses; health savings account contributions; and higher education expenses.
Qualified Contributions. As noted above, contributions to a qualified plan like a 401(k) reduce your taxable income and therefore may ease your tax burden. If you find yourself on the cusp of two tax brackets, even a minor increase to your 401(k) could mean the difference between cutting the Fed a hefty check and not having to come out of pocket at all. Beyond any potential tax benefits of course, increasing salary deferrals to your 401(k) when you can is just smart planning!
All this having been said, your 2018 tax return will likely look very different than 2017’s, given the new tax reform legislation. Nevertheless, we encourage you to stay engaged and ask questions! Understanding how taxes are generated (and spent) increases awareness and helps drive governmental accountability to you, the taxpayer!
Questions? Call or e-mail us!