40 Financial Things to Know by Age 40: Part Three
Knowing these key financial things can help you manage your finances today and lay a solid financial groundwork for your next 40 years.
The fastest way to get your refund.
According to the IRS, there are two things you can do to speed up access to your refund: file your tax return electronically and have your refund directly deposited into your financial account. Refunds are usually issued within three weeks if you use these methods in contrast to six to eight weeks if you file a paper tax return.
Why a smaller refund is better than a larger refund.
Remember, a tax refund is simply a refund of money that you overpaid to the government. Rather than giving the government free use of your money for several months, it is generally between to pay as close to your actual tax liability as possible throughout the year. You can adjust how much tax is withheld from your paycheck by giving your employer and new Form W-4.
Best tax advice ever: Hire a tax pro.
The rules regarding taxes are complex and change frequently. Hiring a tax pro to review your situation and prepare your tax returns can save you time and may help you minimize your taxes and avoid tax penalties.
Terms Used on a Tax Return
AGI, or adjusted gross income, is your gross income minus certain adjustments to your income, such as your deductible IRA contributions, moving expenses, and alimony you paid. Your AGI, or a modified version of it, affects your eligibility for and the value of some tax credits, deductions, and exemptions.
Tax credits and deductions
Tax credits reduce your taxes dollar-for-dollar. Tax deductions reduce the income on which you are taxed. Both are generally based on certain expenditures that you make and are often used to encourage tax-payers to do things the government believes are desirable, such as buy a home, improve the energy efficiency of that home, give to a charity, save for your retirement, and pay for your child’s college educations.
Itemizing deductions enables you to reduce the amount of income on which you are taxed by the actual amount, or part of the amount, that you pay for expenses, such as real estate taxes, home mortgage interest, charitable contributions, and medical expenses.
The standard deduction is a fixed dollar amount that you can generally deduct from you income instead of itemizing your deductions. The standard deduction is generally the way to go if it is larger than your allowable itemized deductions.
An exemption is a dollar amount that you may subtract from your income for yourself, your spouse, and each of your dependents.
A phaseout reduces the value of certain tax benefits as income rises. Several tax credits, deductions, and exemptions begin to phase out when a taxpayer’s income exceeds a certain dollar threshold. Most phaseouts reduce the value of a tax benefit gradually as income rises above the threshold. There are used to prevent higher income taxpayers from utilizing, or fully utilizing, tax breaks intended primarily for lower- and middle-income taxpayers.
Alternative minimum tax
The alternative minimum tax (AMT) is an alternative method of calculating tax that eliminates or reduces some of the deductions and exclusions from income that are allowed when calculating taxes the regular way. The AMT was originally intended to prevent wealthy Americans from using tax loopholes to pay little or no tax, but it now affects some middle-income taxpayers, in addition to high-income taxpayers.To determine whether you are subject to the AMT, your taxes are calculated both ways. You pay the larger amount.
Copper Leaf's team of CPAs and experienced financial planners have worked with clients for more than 15 years to help them achieve their short and long-term financial objectives – mindful of the need to adjust strategies as life circumstances evolve. For more information call 802.878.2731.