The 250 Questions You Should Ask to Get Out of Debt by David Rye & Marcia Rye

Author:David Rye & Marcia Rye
Language: eng
Format: epub
Tags: ebook, book
Publisher: An imprint of Adams Media, Inc.
Published: 2009-07-15T00:00:00+00:00

Chapter 16

GETTING TAX

MONEY BACK

People probably experience more anxiety about taxes than they do about any other debt issue. The average American household pays 40 percent of its income in federal, state, and local taxes. Clearly, taxes are one of the biggest hurdles you’ll have to overcome to achieve your financial goals. Coupled with inflation, taxes steadily eat away at your wages and investments. Reducing your tax liability can help you pay down some of your debts. In order to do that, you need to have a basic understanding of the tax laws so that you can supplement your financial plan with a well-thought-out tax plan.

#147. Where do I start looking for tax breaks?

Start by knowing what tax bracket you’re in. It’s a simple question but only 4 percent of people whom we interviewed in 2008 had the right answer. And yet your tax bracket is essential because it tells you how much of any extra earnings such as raises you actually get to keep. Under the U.S. graduated tax system, as income rises so does your tax rate. Currently, the federal tax law has five basic rates: 15 percent, 28 percent, 31 percent, 36 percent, and 39.6 percent. However, there are hidden phase-outs of exemptions and itemized deductions that will, over time, force you into higher tax brackets even if your income doesn’t increase.

#148. What is the Alternative Minimum Tax (AMT)

all about, and do I need to be concerned about it?

The AMT is a federal tax that affects which tax bracket you fall into, and you need to know about it because it may affect how your taxes are calculated. AMT was created several years ago to boost the taxation of wealthy individuals who use tax shelters to legally avoid taxes. While the intentions of the tax were initially good, the rules haven’t kept up with the times. Many middle-income earners now earn enough and spend enough on tax-sheltered items to qualify for AMT.

AMT rules severely restrict the deductions you are allowed to take, including interest deductions on a home. If you borrow money for anything except home improvements, such as to buy a car, you can’t deduct the interest.

#149. How can I reduce the amount that gets deducted from my paycheck for taxes?

By the time you get through paying federal, state, and local taxes, you’re lucky if you get to keep sixty cents out of every dollar you make. When you are faced with that kind of tax bite, you have to take a proactive position to make sure you’re taking full advantage of every legal deduction that you can. Don’t overwithhold. One of the biggest mistakes that taxpayers make is allowing the government to withhold more taxes than they owe. If you are getting a large tax refund every year, then you probably fall into this category. You are in effect lending the government interest-free money. Increase your exemptions to lower your payroll tax deductions if, and only if, you have the self-discipline to bank the extra money into a secured savings plan like an IRA.

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