What are Some Factors that Can Affect How Much You Pay in Taxes?

Amherst, NH Taxpayer Looks for Advice

The biggest factor that determines how much you will pay in taxes is your taxable income. The federal tax system is progressive, meaning you will pay a higher tax rate as you earn more money. However, not all of the money is taxed at the higher rate, as determined by your tax brackets. Your filing status, whether filing your taxes as single, jointly as a married couple, or as head of household will also affect your tax rate. Adjustments and exemptions can help to lower your taxable income, reducing your tax bill. Tax deductions and tax credits can also lower the amount of taxes that you will have to pay for a calendar year.

A resident in Amherst was looking for advice on how to lower the amount he was paying in taxes. For advice, he turned to the team at Merrimack Tax Associates.

Determining Your Adjusted Gross Income

The amount of money that you will pay in taxes is determined by your adjusted gross income. This is your total income for the year, less any adjustments and exemptions. These tax reductions may include traditional IRA contributions, health savings account contributions, student loan interest payments and other qualified monies. After having arrived at the adjusted gross income, you can further reduce the amount of taxes that you pay through deductions and exemptions. While this will not directly impact your adjusted gross income, it will affect your overall tax bill.

Ways to Reduce Your Tax Bill

Depending on your circumstances, you may choose to take the standard deduction or itemize your deductions. Expenses that can be deducted from your taxes when itemized include mortgage interest, charitable contributions, and qualified medical expenses.

Tax credits can also be used to reduce the amount of money you pay in taxes. These differ from deductions and adjustments in that they can be applied against your final tax bill to reduce the amount that you are required to pay. Tax credits most often derive from education, energy efficiency upgrades, and child care.

By looking at opportunities to lower his adjusted gross income through exemptions and adjustments, combined with lowering his tax bill with tax deductions and credits, the Amherst resident was able to see a significant difference in the amount of taxes paid each year.