Please join our e-mail list to receive my special gift - Escape the paycheck to paycheck bondage through 7 biblical principles!
Ralph Estep, Jr. aims to unravel common tax jargon. He goes over terms like adjusted gross income (AGI), itemized deductions, tax brackets, tax credits, tax shelters and the standard deduction.
Have you ever found yourself baffled by common tax jargon? Adjusted gross income, tax brackets, itemized deductions - these terms can be overwhelming for anyone trying to navigate the complex world of taxes. But fear not, because in today's blog post, we will demystify these terms and provide you with concrete examples to help you better understand and navigate the tax landscape. So, let's dive in and equip ourselves with the knowledge and tools we need to master our finances, lower our taxes, grow our business, and find personal success.
Adjusted Gross Income, or AGI, is a crucial figure used by the Internal Revenue Service (IRS) to calculate your tax liability accurately. AGI helps determine various tax aspects, such as eligibility for certain deductions and credits. But what exactly is AGI? Let's simplify it with an example:
Suppose you're a self-employed individual who earned a hundred thousand dollars last year. However, you are eligible for deductions related to your business expenses, retirement contributions, and student loan interest, totaling $20,000. In this case, your AGI would be $80,000, which is calculated by subtracting the deductions from your gross income. Understanding and calculating AGI correctly is essential to ensure you take advantage of available deductions and credits.
Itemized deductions are specific expenses that taxpayers can deduct from their income, thereby reducing their taxable income. For example, let's say you paid $10,000 in medical expenses, $5,000 in mortgage interest, and $3,000 in charitable contributions throughout the year. These amounts can be itemized and deducted from your income, reducing your taxable income by $18,000. Here's how it adds up:
$10,000 (medical expenses) + $5,000 (mortgage interest) + $3,000 (charitable contributions) = $18,000
Itemized deductions can be beneficial if your total deductions exceed the standard deduction, allowing you to lower your tax liability even further. We'll discuss the standard deduction in more detail later in this post.
Tax brackets refer to the range of income levels at which different tax rates apply. In the United States, we have a progressive tax system, meaning that as your income increases, so does your tax rate. You pay tax as a percentage of your income in layers, and these layers are called tax brackets. Let's explore what the 2023 single tax brackets look like:
- 10% tax rate: Up to $10,275
- 12% tax rate: $10,276 to $40,775
- 22% tax rate: $41,776 to $89,076
- 24% tax rate: $89,077 to $171,051
- 32% tax rate: $171,052 to $215,591
- 35% tax rate: $215,592 to $539,981
- 37% tax rate: $539,982 and above
It's important to note that when your income jumps to a higher tax bracket, you don't pay the higher rate on your entire income. You only pay the higher rate on the part of the income that's in the new tax bracket. Understanding tax brackets can help you better plan your finances and optimize your tax strategy.
Tax credits are a valuable tool for directly reducing your tax liability. Unlike deductions that reduce your taxable income, tax credits are subtracted directly from the amount you owe in taxes. Let's take the child tax credit as an example:
If you qualify for the child tax credit, which is worth up to $2,000 per child, you can reduce your tax liability by $4,000 if you have two eligible children. Other examples of tax credits include the earned income tax credit for low- to moderate-income individuals and families, and the American opportunity credit for qualified educational expenses. These credits can make a significant difference in lowering your overall tax bill.
Tax shelters are lawful strategies or investments utilized by individuals or businesses to minimize their tax liability. One commonly known tax shelter is the individual retirement account (IRA). By contributing to an IRA, you can deduct the amount from your taxable income, reducing your tax liability. Let's consider a simple example:
If you contribute $5,000 to your traditional IRA and fall into the 22% tax bracket, you'll save $1,100 in taxes. Essentially, you're able to put $5,000 into your retirement, but it's only costing you $3,900 to do so. It's important to work with a qualified tax professional to ensure you're utilizing tax shelters appropriately and in accordance with federal tax laws.
The standard deduction is a predetermined dollar amount that reduces your taxable income. It's a fixed amount based on your filing status. For the tax year 2023, the standard deduction amounts are as follows:
- Single filers and those married filing separately: $13,850
- Married filing jointly: $27,700
- Head of household: $20,800
The standard deduction is claimed on your tax returns filed by April 2024. However, it's always crucial to consider your specific situation and consult with a tax professional to determine the best options for you.
Armed with the knowledge and examples provided in this blog post, you can now navigate the world of taxes with confidence. Understanding common tax jargon such as adjusted gross income, itemized deductions, tax brackets, tax credits, tax shelters, and the standard deduction will help you make informed decisions and maximize your financial well-being. Remember, always consult with a qualified tax professional for personalized advice and to ensure compliance with tax laws.
Before we wrap up, we invite you to visit our podcast page at askralphpodcast.com. We'd love to hear from you - leave a review, share your thoughts, or suggest future topics. Your feedback is incredibly valuable and helps us tailor our content to better serve your needs.
Thank you for joining us on this journey toward mastering your finances, lowering your taxes, growing your business, and finding personal success. Stay financially savvy, and may you always prosper.
Please share our Podcast with all your friends and family!
Submit your questions or ideas for future shows - email us at ralph@askralph.com or leave a voicemail message on our podcast page Leave A Voicemail Message
Like us on Facebook and follow us on Facebook at https://www.facebook.com/askralphmedia Twitter (@askralphmedia) or visit www.askralphpodcast.com for more information.
To schedule a consultation with Ralph's team, contact him at 302-659-6560 or go to www.askralph.com for more information!
Buy Ralph's Book - Mastering Your Finances! on Amazon
Thank you for listening to the Ask Ralph podcast. We encourage you to follow us on our social media pages and rate our show. For more information about the topics discussed on the podcast visit Saggio Accounting+PLUS.
EP 39 - Common Tax Jargon
[00:00:00]
Let me peak your curiosity with a teaser question.
Do you often find yourself baffled by common tax jargon? Such as adjusted gross income or tax brackets.
If so, fear not. In today's episode, we will demystify these terms and provide you with concrete examples. To help you navigate the tax landscape with ease. So, without further ado, let's get started.
Welcome to another informative episode of the ask Ralph podcast, how to master your finances. Lower your taxes, grow your business, and find personal success. I'm your esteemed host Ralph Estep, Jr.
And I am thrilled to have you join me today. Whether you're a seasoned entrepreneur, a small business owner, or an individual with a passion for personal finance. This podcast aims to provide you with the knowledge and tools you need to achieve. Your financial goals.
[00:01:00]
Our first jargon term for today is adjusted gross income, or AGI. AGI is a crucial figure used by the internal revenue service or commonly called the (IRS) to calculate your tax liability accurately. So, what exactly is AGI?
Let me simplify it for you. Suppose you're self-employed individual who earned a hundred thousand dollars last year. However, you are eligible. For deductions related to your business expenses, retirement contributions, and student loan interest, totaling $20,000. In this case, your AGI would be 80,000. [00:02:00] That's the a hundred thousand dollars gross minus the deductions. AGI helps determine various tax aspects. Such as eligibility for certain deductions and credits. So it's essential to understand and calculate it correctly.
Let's move on to our next term.
Let's delve into the term itemized deductions.
Itemized deductions are specific expenses. that taxpayers can deduct from their income. Thereby reducing their taxable income. For example. Let's say you paid $10,000 in medical expenses, $5,000 in mortgage interest, and $3,000 in charitable contributions throughout the year. These amounts can be itemized and deducted from your income. Reducing your taxable income by $18,000.
So you asked how did I come up with that? Well, the $18,000 is a combination of the ($10,000 in medical expenses. $5,000 in mortgage interest and $3,000). in charitable contributions.
Itemized deductions can be beneficial if your total deductions exceed the [00:03:00] standard deduction.
And we'll talk about that a little later in the program, allowing you to lower your tax liability even further.
Well, now, let's tackle the concept of tax brackets.
Tax brackets referred to the range of income levels at which different tax rates apply. In the United States, we have what's called a progressive tax system. Meaning that as your income increases.
So does your tax rate. You pay tax as a percentage of your income in layers, these layers are called tax brackets. As your income goes up, the tax rate on the next layer of income is higher.
When your income jumps to a higher tax bracket, you don't pay the higher rate on your entire income.
You just pay the higher rate on the part of the income that's in the new tax bracket.
Now this confuses people sometimes. So let's talk about what those tax brackets look like. So in 2023, and I'm going to only talk about the single tax brackets. There's different tax brackets for single, for married filing joint and head of household, but let's talk about the single tax rates.
So basically [00:04:00] the way it would work. Is on your first $10,275 with the income you would pay 10% tax. On the next layer of income. That's the $10,276 to $40,175. You would pay 12%. You hit the 22% tax rate at $41,776. Then you move on to the 24% tax bracket at $89,076. You reached a 32% tax bracket at $171,051. The 35% tax bracket at $215,591 and you reach the maximum 37% tax bracket once your income reaches $539,981. So you can see the add up as your income increases.
Now let's talk about tax credits.
Tax credits are a valuable tool for directly reducing your tax liability.
Unlike deductions that reduce your taxable income, tax credits are subtracted [00:05:00] directly from the amount you owe in taxes.
So let's say you qualify for the child tax credit. Which is worth up to $2,000 per child. as of this moment. If you have two eligible children, you'll be able to reduce your tax liability by $4,000.
That's $2,000 per child. Other examples of tax credits include the earned income tax credit for low- to moderate income individuals and families,
and the American opportunity credit for qualified educational expenses. I did a podcast about those credits about a week ago. If you want to go listen to those. These credits can make a significant difference in lowering your overall tax bill.
Well now, let's explore the intriguing concept of tax shelters. And this isn't a dirty word.
Folks. Tax shelters are perfectly acceptable. We're not talking about tax evasion. That's the kind of thing that will put you in jail. So tax shelters are lawful strategies or investments utilized by individuals or businesses to minimize their tax liability. That's the whole goal. One commonly known tax [00:06:00] shelter is the individual retirement account or (IRA). By contributing to an IRA. You can deduct the amount from your taxable income, reducing your tax liability.
So let's look at a simple example, of this. If you contribute $5,000 to your traditional IRA and fall into the 22% tax bracket, you'll save $1,100 in taxes. So, what I say to clients is basically. You're able to put $5,000 into your retirement. And it's only costing you $3,900 to do it.
That's a huge tax savings and an immediate return on your investment. It's critical to work with a qualified tax professional. To ensure you're utilizing tax shelters appropriately. And in accordance with federal tax laws. And that's important because there are some. Situations that need to be looked at.
It's not as simple as saying, well, let me just make an IRA contribution.
And lastly, let's talk about the standard deduction. A few minutes ago, we talked about itemized deductions. So let's talk about the standard deduction.
The standard deduction [00:07:00] has a predetermined dollar amount that reduces your taxable income. It's a fixed amount based on your filing status.
The standard deduction is $13,850 for single filers. And those married filing separately. It's $27,700. For those married filing jointly. And $20,800 for those claiming head of household. It is claimed on your tax returns filed by April, 2024. However, always consider your specific situation and consult with a tax professional, determine the best options for you.
And there you have it. My friends! we've explored common tax jargon and provide a concrete examples to enhance your understanding of these terms. armed with this knowledge, you can navigate the tax landscape confidently. Making informed decisions and maximizing your financial wellbeing.
Before we bid farewell, don't forget to visit our podcastPage@askralphpodcast.com.
We'd love to hear from you. Whether it's to leave a review. Share your thoughts, or [00:08:00] even suggest future topics. You can click on the little microphone icon down at the bottom, right. And actually leave us a voicemail message. Your feedback is incredibly valuable to us. And helps us tailor our content to better serve your needs.
Thank you for joining me today on the Ask Ralph podcast.
How to master your finances, lower your taxes, grow your business, and find personal success.
I deeply appreciate your listenership and dedication to your financial growth. Remember, God bless you.
And as I always say, stay financially savvy.
[00:09:00]
