Income, Deductions, and Exclusions - Research Paper Example

Income, Deductions, and Exclusions Income, Deductions, and Exclusions Several s in the US have tax s that provide for various kinds of tax reduction strategies and tools. Such tax codes provide for income, tax deductions, exclusions, refundable, and nonrefundable credits. On a hierarchical scale, a credit gives more tax savings than either a tax deduction or income exclusion, while a refundable credit provides more than a nonrefundable credit. In order to provide special assistance or encourage certain behavior, governments gives targeted relief to specified groups of taxpayers.

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. Increase Tax deductions Another key element in an overall tax situation is taxable income, which is what is left over after one has reduced his adjusted Gross income by his exemptions and deductions. One key step in a tax planning strategy is to track one’s itemized expenses in the whole year using a personal finance programme or a spreadsheet.

He can then rapidly compare his itemized expenses with his standard deductions. Always take the higher of the itemized or standard deduction. One’s personal exemptions and standard deductions depend on his filling status and the number of dependants he has. He can increase them by having more dependants or by getting married. The best technique or step to take to reduce taxable income is to simply itemize deductions, with the three biggest deductions being state taxes, mortgage interest, and gifts to charity (Botkin, 2010).

Utilize Tax credit advantage Once the client has tweaked his taxable income, the next step is to focus on various tax credits, which reduce tax liability. There are tax credits for saving for retirement, for college expenses, and for adopting children. He may also wish to avoid extra expenses. If so, he should avoid early withdrawing from retirement plans such as IRA or 401(k). The amount withdrawn will be part of his taxable income, as well as additional taxes to pay on such early withdrawals.

Sources used to research issues on income, deductions, and exclusions The internal Revenue service (IRS) would be a source of information regarding tax details. Journals and books would also provide guidelines of what has been happening to help relate to the issues addressed. I would use the Free Tax Preparation and Problem Resolution Services. Here, I would learn how to solve tax problems, and how to set up payment plans. This will help me have a deeper understanding of this issue and clearly advice my client on the best way to manage his finances.

The Government Accountability Office (GAO)’s 20-step criterion is the best approach to determine the credibility of the above research. This criterion is based on a Business Process Reengineering Assessment Guide as well as discussions on the tax breakers. The 20 steps in the criteria are potential guidelines considered in tax planning, while problems are identified and addressed using pilot testing; outcomes are evaluated accurately. The criteria will also affirm that this information is credible by providing documentation of the reviews and approve a standardized framework.

I will use the Internal Revenue Service, strategic planning documents, Internal Revenue Manual, and discussions with Internal Revenue Service officials to establish whether the steps addressed were credible. Despite the fact that there are easy steps to reduce tax liability, several variables or inconsistencies are involved in income, exclusions, and deductions. Tax auditing flags is the most common variable. High income than the average person is a variable in itself since it may cause auditing (Attorney, 2011).

Home office deduction is another variable is important but the rules surrounding it are extremely difficult and intricate to follow, yet they must be followed to the end. Drastic income changes may also be risky since the client may not be able to tack his income properly. Since such risks instill fear to the client, I will be conservative in handling his case. Of these variables, high incomes pose the highest risk. I would advice him to be average as possible in his financial endeavors. He should not involve in any financial plans that are extra ordinary or those that may raise an alarm.

Proper documentation is the best way to deal with such risks. References Attorney, F. (2011). Surviving an IRS tax audit. New York, NY: Nolo Publishers. Botkin, S. (2010) Lower your taxes - Big time 2011-2012 4/E. New York, NY: McGraw-Hill. Kohler, M. (2011). What your CPA Isn't telling You: Life-changing tax strategies. Oxford: Entrepreneur Press.