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Income, Deductions, and Exclusions - Research Paper Example
Finance & Accounting
Pages 3 (753 words)
Income, Deductions, and Exclusions Name Institution Income, Deductions, and Exclusions Several States in the US have tax codes that provide for various kinds of tax reduction strategies and tools. Such tax codes provide for income, tax deductions, exclusions, refundable, and nonrefundable credits…
Such “tax breaks” reduce the total quantity of current income tax owned by organizations and individuals. The first step I would take to assist my client is to explain to him the meaning of the three tax codes. Income refers to the flow of cash or cash equivalents gained from salary or wage, interest or profit, or rent. Exclusions are items on a tax return that are reported but not taxed. Deductions are categorized into two; itemized deductions and standard deductions (Kohler, 2011). Majority of tax payers maintain the standard deduction, which is a reduction of the entire income taxes owned, and amounts to a dollar. It adjusts yearly for inflation and differs according to filing status. Some taxpayers gain more from itemizing deductions. Cash spent on mortgage interest, charitable contributions, taxes, casualty losses, and medical care can reduce tax liability. The second step is to tell him how he will use these codes to minimize his tax liability. He can do this by: Reducing income The more money the client will make, the more taxes he will pay. On the other hand, the less money he will generate, the lesser tax paid. The most significant way to reduce income is to contribute money to any retirement plan at work such as a 401(k) (Botkin, 2010). His contribution will reduce his wages, and thus lower his tax bill. ...
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