Reducing your 2014 tax bill using exemptions, deductions
And why your top income tax rate isn't really what you owe Uncle Sam
A week from today, on Jan. 20, the Internal Revenue Service will start accepting our 2014 tax returns.
I've gathered all my preliminary income statements -- the hubby's last pay stub and my invoices for my 1099-MISC earnings -- so I have an idea of what we earned. I've tallied the taxes we paid, both the hubby's payroll withholding and my self-employment estimated taxes. And I have a good idea of the expenses we can deduct.
Armed with all those numbers, I have a rough idea of what our 1040 fill look like in a couple of months. Hey, I never said I was ready to file next week, only that I'm in better shape. I'm aiming to get the IRS all my paperwork by April 15 this year. That's a major step up from the filings close to the Oct. 15 extension deadline that I usually meet!
So that you can feel as confident about your own tax filing readiness as I do, here are some basic 2014 tax numbers to keep in mind.
What's your tax bracket?
When you finish up filling out all those Internal Revenue Service worksheets, schedules and Form 1040 (or 1040A or 1040EZ) lines, the bottom line will be how much of my 2014 take is taxable and at what rate.
The 2014 tax bracket/tax rate table below will let you know.
2014 tax rates and income brackets
|Tax Rate||Single||Head of Household||Married Filing Jointly
or Surviving Spouse
|Married Filing Separately|
|10%||Up to $9,075||Up to $12,950||Up to $18,150||Up to $9,075|
|39.6%||$406,751 or more||$432,201 or more||$457,601 or more||$228,801 or more|
A quick tax brackets/tax rates note to total tax geeks: You can check out the figures for tax years 2010 through 2015 on the ol' blog's special Tax Rates, Tax Brackets Through the Years page.
Remember, your final, total taxable income amount is not taxed at the income tax rate bracket into which it falls. That top marginal rate applies only to the last dollar or group of dollars that fall into your top tax rate.
Because our taxes are progressive, the bulk of money for most of us is taxed at lower rates, starting at 10 percent and working up to our top rate. This means our effective tax rate is lower than our top marginal tax rate.
Say, for example, you made $90,000 last year. Good for you. But you don't pay a 28 percent on all those big bucks. In fact, only $649 of your earnings is taxed at 28 percent. The rest of your money is taxed at the rates into which portions of it fall -- 10 percent, 15 percent and 25 percent.
Exemptions are excellent
Of course, even though your boss points out how she's paying you 90 grand every time you go in to ask for a raise, you're not bringing that much home. There are payroll taxes and your 401(k) pretax contributions that lower your income.
But you want even less when it comes to figuring what you owe Uncle Sam. This is where exemptions and deductions pay off. Let's start with exemptions.
An exemption is the amount of money you can claim on your taxes for yourself, your spouse if you're filing a joint 1040 and all the dependents who, well, depend on you for food, shelter, love. OK, the IRS doesn't care about your emotional support, but you get the idea.
The exemption amount is adjusted each year for inflation. For 2014 taxes, you can claim $3,950 for each eligible person.
Be sure you have the Social Security number of every person you claim as an exemption. Without them on the 1040, the IRS will disallow the claim.
And if you do convince your boss to give you a raise, be aware that it could cost you at tax exemption time. The personal exemption is phased out for higher-income earners.
That exemption reduction starts kicking in for single filers with adjusted gross income (AGI) of $258,250; head-of-household taxpayers with AGI of $284,050; married filing jointly taxpayers with AGI of $309,900; and marrieds filing separate returns with AGI of $154,950.
Deduct, deduct, deduct
The other big way that taxpayers are able to reduce their adjusted gross income to a lower taxable income level is through deductions.
Some of us itemize on Schedule A. But most taxpayers claim the standard deduction. There are three different standard deduction amounts for folks younger than age 65. They are based on your filing status.
The standard deductions for 2014 returns are $6,200 for single or married filing separately taxpayers; $12,400 for married filing jointly or qualifying widows/widowers; and $9,100 for head of household taxpayers.
Whatever your age or filing status, the thing to remember about deductions is to choose the method, standard or itemized, that gives you the larger dollar amount to subtract from your AGI.
That will produce less taxable income and that should mean a lower tax bill.
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