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As tax season approaches, many have questions about navigating the often-complex world of personal taxes. Whether you’re a first-time filer or an experienced investor, it’s important to understand the ins and outs of tax basics that may apply to you, and how to minimize your tax liability. 

In this article, we will explore some of the most frequently asked tax questions from individuals, covering a wide range of topics to help you stay informed and make more educated tax decisions.

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1) How Is An Excise Tax Different From A Sales Tax?

An excise tax and a sales tax are both types of consumption taxes, meaning they are taxes on goods or services. However, there are a few key differences between the two.

An excise tax is a tax that is imposed on a specific good or service (gasoline, alcohol, or tobacco) and is typically a fixed amount. For example, the federal government imposes an excise tax on every gallon of gasoline sold in the United States. Often referred to as “sin taxes” as they are imposed on luxury goods or non-essential items.

A sales tax is a tax that is charged on the final sale of a good or service to a consumer. It is typically a percentage of the purchase price and is collected at the point of sale. Sales tax varies from state to state and in some cases by local municipalities. The revenue generated by sales tax goes to state or local governments.

To recap, an excise tax is a specific tax imposed on select goods and services, while a sales tax is a more general tax paid on the majority of your everyday items. 

2) How Do Tax Brackets Work?

Tax brackets are a way that the government divides taxpayers into different groups, based on their income level. Each group is then subject to a different marginal tax rate, which is the percentage of taxes that is applied to the level of earned income.

In the United States, the tax brackets for the 2023 tax year are:

2023 Income Tax Brackets

Percentage Single Filer Married Filing Jointly Married Filing Separate Head of Household

0%

> $11,000
> $22,000
> $11,000
> $15,700

12%

$11,000-$44,725
$22,000-$89,450
$11,000-$44,725
$15,700-$59,850

22%

$44,725-$95,375
$89,450-$190,750
$44,725-$95,375
$59,850-$95,350

24%

$95,375-$182,100
$190,750-$364,200
$95,375-$182,100
$95,350-$182,100

32%

$182,100-$231,250
$364,200-$462,500
$182,100-$231,250
$182,100-$231,250

35%

$231,250-$578,125
$462,500-$693,750
$231,250-$578,125
$231,250-$578,100

37%

$578,125+
$693,750+
$578,125+
$578,100+

3) What Is The Difference Between A LLC And A S-Corp?

LLCs (Limited Liability Companies) and S-Corps (S-Corporations) are two differing forms of business structures. While they do share some common characteristics, they also differ in a few key ways. 

An LLC is a type of business structure that provides its owners (aka “members”) with personal liability protection and pass-through taxation. In simpler words, the business itself is not taxed on its income, but rather the income is passed through to the members therefore, taxed on their personal tax returns. LLCs also offer flexibility in terms of management and ownership. It can be owned by one single person or multiple people.

An S-Corp is a type of business structure that is taxed as a corporation, but it has elected to be taxed under the “S” subchapter of the IRS code. What this means is that S-Corp companies act as pass-through entities and its income, losses, etc. are passed through to its shareholders and reported on their personal tax returns. Instead of the corporation being taxed as a whole. 

In a nutshell, LLCs and S-Corps are similar in that they both function as pass-through entities. However, the a key difference here is that S-Corps have restrictions on things such as the number of shareholders, who the shareholders must be (individuals, trusts, etc.) and they are more strict in terms of their governance. On the contrary we see that LLCs are more lenient on their management and ownership structure and don’t adhere to as many restrictions. 

4.) What Is Inheritance Tax And Which States Have It?

When a loved one passes, the assets they left behind may be passed down to various people in their family. Some states have what is called an “inheritance tax” which will be applied to those acquired assets. For the majority of U.S. citizens, you won’t have to worry about this tax because only six states impose it. 

  • Iowa 
  • Kentucky 
  • Maryland
  • Nebraska
  • New Jersey
  • Pennsylvania

If you live in any of these states, the amount you might be taxed will depend on the state in which your loved one lived, the value of the inheritance, and the relationship you had to the relative. 

5) What Is The Difference Between A Deduction And A Credit On A Tax Return?

Tax credits and deductions are both ways of reducing the amount of taxes you owe, but they work differently. Tax deductions lower the amount of your income that is subject to tax, which can directly decrease the amount of taxes you owe. Tax credits, on the other hand, directly reduce the amount of taxes you owe on dollar-for-dollar a basis.

Tax Credit Example:

Tax amount(TA) – $10,000

Tax credit(TC) – $5,000

$10,000(TA) – $5,000(TC) = $5,000 in tax savings 

Tax Deduction Example: 

Tax Deduction Amount – $5,000

Income Tax Bracket – 22%

$5,000 x 22% = $1,100 in tax savings 

As you can see, in the tax credit example, your $5,000 tax credit directly reduced your tax bill by the exact amount. In the tax deduction example, since the deductible amount of $5,000 is subject to your income tax rate, you will only be lowering your tax bill by $1,100. So hunt for those tax credits because it is likely you will see a greater reduction in your tax obligations. 

6) How Does The Alternative Minimum Tax (AMT) Work, And Who Is Typically Affected By It?

The Alternative Minimum Tax (AMT), is a separate tax calculation meant to make sure that certain taxpayers pay a minimum amount of income tax. This tax calculation applies different rules, such as limiting certain deductions and credits, in turn making your tax bill higher than it would be under regular tax calculations.

AMT typically only affects the high earners of the world. When reporting your income during tax time, if you cross the AMT exemption border, you’ll trigger the AMT tax. In layman’s terms, taxes will be calculated using the standard tax rules and then calculated again using the AMT rates (26% or 28%). You will then have to pay the higher of the two amounts.

7) What Are The Income Limits For The Earned Income Tax Credit (EITC)?

The Earned Income Tax Credit (EITC) is a federal tax credit for low-to-middle income working individuals and families. It is designed to help offset the cost of living and reward work by providing a tax credit to those who meet certain income and eligibility requirements. Income limits and tax credit amounts for 2023 are in the table below. 

2023 EITC Income Ranges and Tax Credit

Number of Children Single Filers Married Filing Jointly Maximum Tax Credit
0
$7,840 – $17,640
$7,840 – $24,210
$600

1

$11,750 – $46,560
$11,750 – $53,120
$3,995

2

$16,510 – $52,918
$16,510 – $59,478
$6,604

3+

$16,510 – $56,838
$16,510 – $63,398
$7,430

It is important to note that depending on where you fall within the income ranges you may or may not receive the maximum credit amount. Once you reach the halfway mark in each range you will only receive a portion of the credit based on earnings. 

8) Are Unemployment Benefits Taxable?

Yes, in the eyes of the IRS, any money collected throughout the year via unemployment benefits will be viewed as taxable income. When it comes time to file taxes, you will receive a Form 1099-G that will show the amount of compensation you received. Take note that if you live in a state that also taxes income, they might levy your unemployment benefits as well. 

9) How Does The Child Tax Credit Work, And What Are The Eligibility Requirements?

The Child Tax Credit is a federal tax credit designed to help families by reducing the amount of taxes owed on their income. For tax years 2022 and 2023 the credit is worth $2,000 per child, and phases out for families above a certain income threshold. 

The qualifications to receive the Child Tax Credit are: 

  • Child must be 18 years or younger 
  • Be your son, daughter, stepchild, foster child, brother, sister, grandchild, niece or nephew
  • Child did not provide more than half of his/her own financial support during the year 
  • Child must have lived with you for more than half the year
  • Child is properly claimed on your filed tax return 
  • Child is a U.S. citizen, national or resident alien  

10) How To File An Extension For Tax Returns?

Filing for an extension on your taxes will require you to fill out and submit an additional form. In the case of extensions, this will be the IRS Form 4868. You must have the document submitted before the last day for filing taxes. There are no specific criteria you need to meet in order to ask for an extension and you won’t be penalized for doing so either. 

11) How Can I Reduce My Tax Bill?

There are a lot of nuances when it comes to taxes, but the overarching question most people have every year is, “how do I pay less in taxes.” The list of ways to reduce your taxable income can be quite extensive. However, here is a short list of ways most Americans are able to reduce their tax liability. 

  1. Contribute to a retirement account 
  2. Pad your health savings account
  3. Find state level tax breaks (where applicable) 
  4. Don’t forget about the Child Tax Credit 
  5. Donate to a charity 
  6. See if you qualify for any tax credits
  7. Start a savings account for your child’s college tuition 

12) Can I Deduct Medical Expenses?

Yes, medical expenses can be deducted from your taxes, but there are some stipulations. The expenses must be valid and unreimbursed, meaning insurance didn’t cover the cost entirely. Currently, you can be reimbursed for any medical expenses that surpass 7.5% of your adjusted gross income (AGI). 

For example, if your AGI is $60,000, any amount over $4,500 ($60,000 x 7.5%) is deductible. This means if you accrued $15,000 in medical bills during the year, $10,500 can be deducted come tax season. 

13) Should I Itemize Or Claim The Standard Deduction?

The answer to this question could be a whole article within itself. However, the general rule of thumb is that you should choose itemization over the standard deduction if the valuation of your itemized expenses would be greater than the value of your standard deduction. 

Frequently Asked Questions

  • A Certified Public Accountant (CPA) is a professional who has passed the CPA exam and met the requirements set by their state board of accountancy. They provide accounting and tax services such as preparing financial statements, and tax returns and providing financial advice.

  • Standard deductions are fixed dollar amounts that taxpayers can subtract from their taxable income, thus reducing the amount of income that is subject to tax. They are generally available to all taxpayers who do not choose to itemize their deductions instead.

  • A progressive tax is a tax system in which the tax rate increases as the income of the taxpayer increases. It aims to redistribute wealth and place a greater burden on those who are able to afford to pay more taxes, thus reducing income inequality.

  • If you do not qualify for the Child Tax Credit, you may still qualify for other tax credits such as the Earned Income Tax Credit (EITC) or the Credit for Other Dependents (ODC). It’s always a good idea to consult a tax professional to see if you qualify for other tax breaks.

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Ashlyn Brooks

Ashlyn Brooks is a financial writer and former civil engineer. She's on a mission to show others how to save and spend smarter through purposeful money habits. Her work has been featured on Investor.com, HerMoney.com, MoneyGeek and QuickBooks