Taxes are an unavoidable part of life, and the rates you pay depend on your taxable income. Depending on your income, you may fall into one of seven different federal income tax categories, each with its own marginal tax rate. Fortunately, there are a variety of tax credits available to help reduce your tax burden. These include credits for education expenses, retirement savings, energy efficiency improvements in your home, the purchase of an electric vehicle or electric vehicle charging equipment, having a child, and expenses for caring for children and dependents.
Capital gains taxes are also an important factor to consider when it comes to taxes. The capital gains tax rate applied to a capital gain depends on the type of asset, your income taxable amount and the time during which you kept the property sold. For example, depositing money into a traditional IRA or 401(k) account will reduce your taxable income because contributions to these accounts are made before paying taxes, meaning that what you deposit doesn't count as income (up to a certain limit). When it comes to choosing between the standard deduction and itemized deductions, be sure to choose the more important of the two options.
Itemized deductions include cancellations of medical expenses, state and local taxes, mortgage interest, donations to charitable organizations, and more. They're actually more valuable than tax deductions since they subtract dollar-for-dollar from your tax bill. It's important to note that the tax rates on capital gains from the sale of stocks, bonds, cryptocurrencies, real estate and other capital assets are not necessarily the same as the tax rates mentioned above for salaries, interest, retirement account withdrawals and other income ordinary. However, long-term capital gains brackets are configured so that you generally pay taxes at a lower rate than if ordinary tax rates and brackets were applied.
With inflation being unusually high lately, inflation adjustments impact tax categories more this year than we are used to seeing. When a category expands, you're less likely to end up in a higher tax bracket if your income stays the same or doesn't grow at the rate of inflation from year to year. Now is the time to review the capital gains tax rules you need to know to plan for the end of the year. Most Americans request the standard deduction on their federal tax return instead of itemized deductions.
For a list of common tax exemptions that you may not have considered, see the 20 most overlooked tax deductions, credits and exemptions.