April 18th. A date that looms large in everyone’s mind. Awaiting its arrival is like waiting to turn 30 year after year, except Uncle Sam won’t buy you a round of conciliatory drinks at the end of tax season. The IRS won’t say a toast for you, either. Though they’ll toast you for not complying with their rules, regulations, dates and procedures.
They’re for the birds, but they’re also for you. To make paying taxes a bit easier, the government has devised two ways of paying yours over the course of the year instead of one, springtime lump sum.
- If you’re a full-time, regular employee, your income taxes are withheld from your wages
- Smart entrepreneurs and independent contractors make estimated tax payments each quarter to keep penalties at bay
How Are Taxes Calculated?
If you’re not a tax professional, calculating taxes probably feels like rocket science. It really isn’t. The IRS follows a simple four-step formula:
Gross Income (–) Adjustments = Adjusted Gross Income (AGI)
AGI (–) Standard Deduction = Taxable Income
AGI (–) Itemized Deductions (–) Personal Deductions = Taxable Income
Taxable Income (x) Applicable Tax Rate = Income Tax
Income Tax (–) Credits = Income Tax Liability
Know Your IADCs
Prepping for tax time is all about paperwork. It also pays to know your Income, Adjustments, Deductions and Credits (IADCs) ahead of time.
Here are a few examples of the IADCs available to you:
Income can include your salary, commissions, bonuses, business income, alimony received, capital gains, dividends and interest
Adjustments can include alimony paid, student loan interest, self-employment tax, Health Savings Accounts (HSAs), moving expenses and IRA deductions.
Deductions can include qualified mortgage interest, investment interest, charitable contributions, medical expenses over 10% of AGI, state and local property tax, and general sales tax.
Credits can include earned income, child and adoption tax credits, child and dependent care, retirement savings “savers credit,” education tax credits, energy tax credits
Before you file, check in with an accounting or tax professional to make sure you haven’t left any IADCs on the table. Remember, they’re yours for the claiming.