What are the benefits of paying income tax? | Bryan Patrice

Bryan Patrice believes in trust and hard work. He is a very good Fund Manager and Financier. He has skills and a lot of experience to complete his job. Bryan provides the best solution to its clients for their financial plan. The term "tax benefit" generally refers to any tax law that provides you with an opportunity to reduce your tax bill when you satisfy certain eligibility requirements. A tax benefit comes in different forms, such as a deduction, exclusion, or credit. The amount of tax you can save also depends on the type of tax benefit you claim because they each offer a different form of savings.

Saving tax with deductions

The most common type of tax benefit comes in the form of a tax deduction. When you claim a tax deduction, it reduces the amount of your income that is subject to tax. The amount of the deduction you are eligible to claim is precisely the amount of the reduction to your taxable income. Frequently claimed deductions cover the cost of tuition and fees, medical expenses, charitable contributions, and state income taxes. Another benefit to a deduction is that it reduces the income subject to the highest tax brackets first.

Excluding income from income tax

Exclusion from tax provides the ultimate tax benefit because the income never ends up on your tax return, and if it does, it generally comes off in another section of your return. Exclusions essentially classify certain types of income as tax-free.

One of the largest exclusions available to taxpayers is the foreign earned income exclusion. In 2019 for example, the law allows you to exclude up to $105,900 of income that you earn outside the United States provided you remain in a foreign country for most of the tax year. Unlike deductions, exclusions are not subject to limitations or reductions; you either meet the requirements to exclude the income or you don’t.

Claiming tax credits

A tax credit generally has more tax-savings potential than a deduction as it provides a dollar-for-dollar reduction in the amount of income tax you owe rather than merely reducing the amount of income subject to tax. Tax credits exist for an array of expenses you might incur during the year from college tuition to the installation of energy-efficient equipment in the home.

When claiming any tax credit, the IRS generally requires you to prepare a separate credit-specific form to document and calculate the amount you are eligible for, regardless of the amount you are claiming. In contrast, most of the available tax deductions do not require you to fill out additional forms.

Reducing income tax with capital losses

Losing money is never a pleasant experience. However, one advantage of a loss is that it may provide you with a tax-reducing benefit. Frequently, taxpayers sell their stocks during the year for less than they paid for them. You can use this capital loss to offset other capital gains you have during the year.

If your losses exceed gains, you can then use up to $3,000 of the loss each year as a normal tax deduction until you have deducted the full loss. To claim this loss, you must calculate all of your capital gains and losses on the Schedule D attachment to your personal income tax return. If you intend on using a part of the loss in future tax years, be sure to keep a copy of this Schedule D in a safe place.