Owing the Government less money by maximizing deductions! (Part 1)

Tax Season...

To some, it's the most dreaded time of the year, to others, it is a wonderful time.  It all depends on which side of the line you are on.  The side of where you owe the government money, or the side of where the government owes you money.  Typically, the government gets its cut up front, hence this is why you see things like "Fed Inc Tax" on your paycheck with a big "-" sign beside it.  

Now many wonder why they still owe the government money even after paying so much in taxes all year.  Well, let me give you a rough example of how to calculate taxes:

*DISCLAIMER:  I AM IN NO WAY AN OFFICIAL TAX ACCOUNTANT NOR OFFICIAL, THIS EXAMPLE IS BASED ON MY UNDERSTANDING AND I DO NOT CERTIFY IT FOR CALCULATING TAXES.  PLEASE USE FOR GUIDANCE AT YOUR OWN RISK*

First, let's calculate your taxes using the document from the following link:

http://www.irs.gov/pub/irs-pdf/i1040tt.pdf

2008 Tax Rate Schedules

Filing status of Single

Taxable Income Over:	But Under	The tax is:	of the amount over
0$	$8,025	10%	$0
$8,025	$32,550	$802.50 + 15%	$8,025
$32,550	$78,850	$4,481.25 + 25%	$32,550
$78,850	$164,550	$16,056 + 28%	$78,850
$164,550	$357,700	$40,052.25 + 33%	$164,550
$357,700	....	103,791.75 + 35%	$357,700

Let's take a person who makes roughly $50,000/year of taxable income.  The total amount of taxes they would pay is calculated by the following formula:

4481.25 + (.25 * (50000 - 32550)) = 8843.75

This is very close to the estimated tax of the document, which is 8850.

Now this calculated amount is strictly without any deductions or exemptions.  As you can see, you owe the government over $8000 in taxes!  If you do not take out enough money, you will be required by the government to pay at the end of the year (by April 15).  However, let's see the difference a few deductions can make.

Let's take the same person who roughly makes $50,000/year of taxable income.  The total amount of taxes they would pay (after taking a standard deduction and one exemption [claiming as sole dependent]) is calculated by using the following formula:

4481.25 + (.25 * ((50000 - (5450 + 3500)) - 32550)) = 6606.25

$5450 deduction is the standard deduction for a single employee

$3500 is the deduction for claiming a dependent.  You claim yourself as a dependent (if no one else can claim you).

As you can see, with standard deductions, you can save approximately $2000 on the amount of taxes owed to the government.  

Website used to calculate the taxes.

This is just the first half of calculating your taxes.  The next article will feature some common deductions and tips on maximizing your deductions to reduce the total amount owed to the government so that you can pay the least amount or even get a refund back.

Stay Disciplined!

By all means, please leave comments if there are any corrections you would like to make or have any information about deductions.