Taxes are one of the most significant liabilities that a person or business will ever have in their lives. When it comes to taxes, a person or business needs to pay a certain amount of their earnings to the government in order to fund things such as roads, schools, law enforcement, national defense and government programs that assist people in need. While taxes may be a significant burden, there are ways to manage them and use the tax laws to one’s advantage. With a proactive approach to knowing about taxes and how to manage them, an individual or business will be able to more easily handle this costly liability and remain prosperous.
Income Taxes
The most common type of taxes that a person will need to pay is income taxes. These are taxes that are charged on one’s income. In other words, a person is required to pay a certain percentage in taxes based on the income they have earned. In most cases, income taxes are the highest amount one will pay. However, with careful planning and strategy, one can limit the amount of income taxes they pay by using certain deductions.
Business Taxes
Another type of taxes that must be paid is business taxes. These are taxes that are charged to either an individual business owner, a partnership, a limited liability company member or a shareholder of a S corporation. Similar to income taxes, business taxes are a percentage charged based on the total profits a business has earned during a given period. Since business taxes are a considerable liability, it is important to maximize deductions in order to lower the total liability and for businesses to keep most of their profits.
Corporate Taxes
Corporations are separate legal entities that earn revenue and profits. The type of corporation that is liable for corporate taxes is the C corporation. This type of entity is taxed on both the profits and the income of the shareholders. The taxes of a C corporation are comparable to income taxes as they will usually pay between 10% and 35% taxes on their profits depending on how much they make. With double taxation, C corporations will need to plan carefully and come up with good strategies to limit the tax burden.
Property Taxes
There are other types of taxes that are charged to individuals that aren’t associated with income. The main type of taxes that one must pay if they own real estate is property taxes. These are taxes that are charged to homeowners and landlords. In most states, the percentage of property taxes ranges between .05% and 1.5%. However, there are some states that charges as high as 2% of the total property’s value. This type of taxation goes up when the value of the property goes up. As a result, it is important to keep this in mind when planning your financial future.
Capital Gains Taxes
Those who invest in stocks and other financial assets are charged capital gains taxes. This is a percentage charged on the amount one makes when selling one of their financial assets. The rate ranges between 15% and 35% and for short term and long term capital gains. With short term capital gains, one sells an asset within one year and is charged a percentage on the amount they made. Long term capital gains are assets sold two or more years after acquiring the asset. Since capital gains taxes can be quite costly, it is important to defer this liability and evaluate your savings goals before selling the asset.
Deductions for Individuals
Since taxes can be quite burdensome, it is important to look into deductions so that you can minimize your liability and keep more of your money. Fortunately for taxpayers, there are plenty of deductions for individuals. Some of these include itemized deductions such as mortgage interest, the earned income credit, education credits, the self employment tax deduction, the self employed pension deduction and the standard deduction. These help lower the taxable income and limit the amount of taxes you need to pay.
Deductions for Businesses
As well as there being deductions for individuals, there are deductions for businesses. Some of these include depreciation, rents, utilities, insurance, cost of goods sold, salaries/wages and auto mileage. With all of these deductions business owners can limit the tax liability they pay and save more of their money with their businesses. In fact owning a business is one of the best ways to limit your overall tax burden because of all of these available deductions.
Deferring Taxes
Once you are aware of all of the different types of taxes and the available deductions it is also important to look into postponing tax payments if possible. As a result, a taxpayer will benefit by deferring taxes. This is a process in which a taxpayer invests in an asset and waits until a sale or withdrawal before they need to pay. By deferring taxes, a person or business can avoid costly liabilities over time and ensure that they reach their financial goals when they intend to.
Filing and Paying
Whether you are an individual who makes a wage/salary, a business owner, a corporate shareholder or an investor, it is very important to file and pay your taxes on time. Those who don’t do this are usually liable for penalties and interest which can be quite costly over time. As a result, it is important to know the due dates of all tax forms and payments at all times. Contact a tax professional such as a certified public accountant or a tax attorney. They will help you file and pay all of your taxes on time and help you avoid costly penalties and interest.
Taxes are a significant part of anyone’s finances as it is a necessary liability that a person or business has. Since taxes are quite significant to anyone’s finances, it is important to know all about the different types of taxes and how to manage one’s debt efficiently. With the help of a tax professional and using deductions to one’s advantage, anyone can find a way to preserve their fortune and keep this liability to a bare minimum on a consistent basis.