How to Best Manage Your Income Taxes
The famous saying “In this world nothing can be said to be certain, except death and taxes” is often attributed to Benjamin Franklin. Whether or not Franklin was the first to say this famous quote, the quote itself is quite good in putting forward the feeling people have towards tax.
While most don’t jump out of joy when income tax filing approaches, it is nevertheless an important part of one’s finances. But how to best manage your income taxes? In this guide, you can 1) learn about income tax, 2) the benefits of managing your taxes and 3) tips for ensuring you are doing the right things when it comes to income tax.
WHAT IS INCOME TAX?
Income tax is one of the most known taxes around the world. It is a tax governments impose on financial income the entity generated within the government’s jurisdiction. Income tax is imposed on both business entities as well as individuals. The income tax of companies or corporations is often referred to as companies tax or corporate tax.
The tax is payable on the gains from a specific period set by the governing jurisdiction. In most instances, the period is the country’s financial year, but corporations especially might pay income tax for a shorter period as well. There are also other differences in the procedures and you can find more about these in the sections below.
A business entity or the individual might in some instances be eligible to receive a tax refund. On the other hand, if the entity has filed an income tax return, which doesn’t fully cover the required amount, they might need to pay extra at the end of the tax period.
There are different methods countries use when it comes to deciding income tax rates. In the majority of cases income tax for individuals follows a progressive tax scale. This means that those who earn more often pay more in proportion to those earning less. Most countries use income tax to fund basic government functions such as healthcare, education and infrastructure.
When it comes to the history of income tax, it is interesting to note the concept is relatively new one. Although different taxes have been part of the human history since the earliest of times, tax on income has been a relatively new invention.
For instance, in the US the first income tax was imposed during the War of 1812, as a method of repaying the debt incurred through war-related expenses. When the war ended, the tax was repelled, but income tax became a permanent fiscal tool in the early 20th century.
You can find out more about the history of income tax in the US from the video below:
Differences in income tax around the world
The income tax systems around the world can vary somewhat, but there are certain similarities as well. Here’s a quick look at the similarities and differences around the world.
There are some differences and countries have dealt with issues on double taxation with different tax treaties.
This means most people are subject to income tax from earnings they receive from all over the world in a single jurisdiction. Thus, a resident in the UK would need to pay income tax on all earnings, whether or not the payments were made in the UK.
One exception to the rule is Hong Kong and Singapore. These regions only tax residents on the income earned in or remitted to the country.
Furthermore, the income that is taxed typically refers to payments that enrich the taxpayer. Naturally the most common is payments from offering ones labour either through services or goods. In addition, most countries also include payments such as gain from a sale of property, interests, pensions, dividends, annuities, and such as income.
There are also country differences as to how income tax is paid. In many systems, the tax is automatically withheld from payments, such as salary, and the taxpayer can later file tax return and receive tax refund, if too much money was withheld or on the other hand, the person might be required to pay more. But other countries require the person to make a tax return at the end of the tax period and make the payment accordingly.
Perhaps the biggest differences between countries are in terms of income tax rates. Most countries use a progressive rate for individual income tax, whereas business income tax is often set to a single rate.
If you are not interested in paying income tax, you should know there are a few countries in the world with a zero income tax rate. Among the countries that don’t impose an income tax are:
- The Bahamas
- The United Arab Emirates
THE BENEFITS OF MANAGING INCOME TAXES
Filing income taxes is not the top activity for most people. There are huge differences in the procedure, yet the process always requires quite a bit of work.
Therefore, it is crucial you’ll find the best ways to manage your income taxes. In fact, there are some big benefits to managing the payments and the process appropriately. Before we look at how to best manage your income taxes, here are some key benefits you’ll be able to enjoy if you do so.
Cut the stress
First, you can cut quite a bit of stress from your life if you manage your income taxes. The truth is much of the income tax stress people experience is self-created. For instance, in the US, nearly 50 million people file their income tax returns on the final two weeks before the deadline. This means around one-third of the individual income tax returns are filed in the final minutes – clearly something to get anyone’s stress levels rising.
Part of the reasons why people tend to procrastinate is down to insufficient understanding of income tax. That is why a proper management of your accounts will immediately help your tax filing and therefore, reduce stress.
Avoid penalties or wrong payments
Another reason to manage your income tax returns is purely to cut down the risk of having to pay penalties or to have to pay more later. If you prepare your taxes on time and spend enough time understanding what you need to pay, you’re less likely to make a mistake and suffer from it.
According to figures from the UK tax authority, nearly 730,000 million people from the total 10.34 million who had to file for self-assessment of income tax filed them late. This resulted in £73 million worth of payment penalties. While this is good for the taxman, it definitely isn’t something you want to aspire to.
If you have to file your income tax in a rush or if you don’t have appropriate knowledge of the tax system, you’ll most likely end up making a few mistakes. While these might not amount to anything serious, you still don’t want to be paying for any more than you need to.
Boost your income, pay less tax
Finally, perhaps to biggest benefits of managing your income tax is all about financial gain. As mentioned above, if you don’t plan for your taxes properly and you make them on the last minute, you don’t just suffer from stress, you might also end up having to pay for mistakes or late payments.
But even if you file your tax return on time, you might miss out on certain benefits available to you, if you don’t pay a lot of attention to your tax. Most systems in the world have different benefits and quirks you might be able to enjoy, but because knowing about these requires some research, many don’t get to benefit from them.
For example, in the US, nearly 70% of taxpayers only file for the most commonly known tax returns. Part of this is down to improper understanding of what you can deduct and claim from your income tax, and part of it is down to avoiding more hassle.
But if you properly manage your income tax, you can end up paying less income tax and have a more hassle-free tax filing experience. Filing taxes doesn’t need to be difficult and the following section will help you manage your income taxes in a straightforward manner.
KEY STEPS TO TAKE
Now that you understand what income tax entails and the benefits of managing your payments, it is time to look at the key steps for proper tax management. Looking after your finances doesn’t need to be difficult and time-consuming, but it will require a bit of planning.
Here are the key steps you need to take in order to best manage your income tax.
Know the crucial tax dates and prepare for them
First, it is important to understand when your income tax filings are due. You don’t want to be rushing through the filing process on the final minute and learning the tax dates can help you start planning.
Remember there are different dates you often need to keep in mind. It is important to make note of all of them and further analyze which are essential for you during a given tax year. Although the actual dates will vary from country to country, the following are a list of the key tax deadlines you should check with your tax authority:
- The tax period – make sure you note the taxation period from start to finish to ensure you calculate the tax correctly.
- Deadline for filing income tax – keep in mind you might have different deadline for online and offline submissions.
- Deadline for filing tax returns.
- Deadline for filing different parts of income tax – in some countries different aspects of the income tax, such as dividends, might need to be filed separately.
- Deadline to seek extension.
- Deadline for paying incomes tax – again, you might have a different deadline for online and offline payments.
- Deadline for paying extra income tax.
- Deadline for paying payments/corrections.
- Other payment deadlines such as pension payments, health or social security payments.
All of the tax deadlines can be found on your tax jurisdiction’s website. Many countries’ tax authorities also produce a handy calendar with the key deadlines. This can be a great basis for your income tax plan.
Once you are aware of the dates, you need to set yourself notifications to ensure you file your taxes on time. Set up an alarm for six months before a deadline, three months before the deadline, two and one month before the deadline and then one a week before to ensure you don’t miss the date.
Start filing income tax related items and stay organized
You also want to dedicate a folder or a drawer to income tax related paperwork. This ensures you don’t need to spend the final week looking after your statements. The more organized you are in storing your files, the less pain you’ll have during the filing process.
Print out a copy of your income tax files, even if you file them online, and the files for tax deductions. Check what sort of information is needed and make sure you gather all of these papers into your special tax folders.
Every time you receive a receipt or a statement that can be useful for your income tax filing, add it to your folder. This way, you don’t need to run around the house during the tax process.
Understand what you need to pay
You’ll also need to educate yourself in regards of income tax, albeit it being quite a boring subject. The more you know about the income tax, the more straightforward and easy the process will be.
It is a good idea to get a copy of the jurisdiction’s income tax rules and check what sort of tax you are supposed to pay. If you find it hard to read the text and to make any sense of it, you might want to consider attending an income tax workshop.
If you are a small business owner, your local small business group might run free workshops in regards of income tax. Sometimes these might even be available for individuals. Furthermore, it is often worth the money to consider visiting an accountant for advice at least once to ensure you have a good grasp of the system.
Understand the deductions available
There are plenty of tax deductions available for individuals and corporations when it comes to income tax. Unfortunately, many entities don’t take full advantage of these legal tax deductions.
As well as understanding all the things you are required to pay under the income tax, you’ll also want to stay on top of the tax deductions. These can cut down your income tax bill by quite a bit.
Most people know tax deductions are available for things such as business use of a car, purchases that directly affect your ability to do business and so on. But you can often deduct taxes on things such as hobbies, house cleaning and even home renovations. Make sure you check your income tax rules carefully.
Available tax deductions can also be found on the jurisdiction’s website. Furthermore, just as above, you might want to consider checking your individual tax situation with a professional accountant or tax advisor.
Check for tips on how to cut your tax bill
As well as using a tax advisor, the Internet is a great place to find out more tips. You can find great tips for cutting your tax bill and ensuring you don’t pay too much nor too little.
CONSIDER USING INCOME TAX MANAGEMENT SOFTWARE FOR HELP
As well as talking with an income tax advisor, the Internet also offers great software options for filing taxes. There are different programs to make the process easier and software that can count your final tax for you based on the figures you provide!
There are both paid and free software available. If you are considering paying for software, it is a good idea to check around and ask comments from other users to find the right product for you. Certain software might not have availability for different tax jurisdictions, so make sure you check the compatibility with your country before spending any money.
The below are some of the recommended tax management software available:
- TaxACT Deluxe
- H&R Block Deluxe
- Intuit TurboTax Deluxe
- TaxSlayer Classic
Make sure you also check whether the software is legitimate and supported by your tax jurisdictions. You don’t want to rely on software purely, so make sure you always check your income tax manually as well.
Don’t panic if bad things happen
Are you reading this guide on the final day of your income tax filing? If so, don’t panic. Minor mistakes and late filing don’t need to mean the end of the world.
If you find yourself late for filing tax payments, check whether you can still apply for an extension. Furthermore, if you find your tax bill to be too much, you can often apply for an installment agreement, which will allow you to pay your taxes in two or more separate payments.
The country’s tax authority will have a helpline you can call in case you have questions. Above all, it is always better to contact your tax jurisdiction immediately instead of trying to figure out something yourself.
Finally, try to always learn something from your past mistakes. If your tax filing still took a lot of your time last year, think what could help the next year. Could you store your income tax files differently or perhaps it is time to consider professional accounting program or an actual accountant for help?
Proper income tax management ensures you pay the right amount – not too much but also not too little to get in trouble – and it also ensures you with a more peace of mind. When you plan for your taxes well and take advantage of the help around you, income taxes won’t be a thing to be afraid of anymore.
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