Sanjeev Kumar CPA

When it comes to tax planning and return preparation, two concepts often confuse most of us – the marginal tax rate and the effective tax rate. While both are crucial for tax planning, they serve different purposes and affect your finances in different ways.– Read on to understand marginal vs effective tax rate and how it affects the taxes you owe. Effective Tax Rate This is the average percentage of your total annual income that you owe as taxes. The effective tax rate is, therefore, the average rate at which an individual or a corporation is taxed on their earned income. To calculate this, you will need two key pieces of information: It is calculated by dividing your total tax liability by your total taxable income. The effective tax rate gives an accurate picture of your overall tax burden because it accounts for the different rates applied to different portions of your income. For example, if you have a total annual income of $100,000 and your total tax is $20,000, your effective tax rate is 20%. Usually, the effective tax rate is much lower than marginal tax rate, which could be as high as 37% as per the 2024 tax slabs defined by the IRS. Marginal Tax Rate The marginal tax rate is the percentage of tax you pay on your next dollar of income. In other words, it’s the tax rate that applies to the highest portion of your income. The United States adopts a progressive tax structure. This means that for every additional level of income, your tax liability increases proportionately. While calculating taxes in this tax structure, the taxpayer’s taxable income is segregated into tax brackets. Each bracket corresponds to a different income range and tax rate. For example, the marginal tax rates applicable for the year 2024 are as below: Tax Rate For Single Filers For Married Couples Filing Jointly  For Married Couples Filing Separately For Head of Household Filers 10% $11,600 or less  $23,200 or less  $11,600 or less  $16,550 or less 12%  $11,601 to $47,150 $23,201 to $94,300 $11,601 to $47,150 $16,551 to $63,100 22%  $47,151 to $100,525  $94,301 to $201,050  $47,151 to $100,525 $63,101 to $100,500 24%  $100,526 to $191,950  $201,051 to $383,900  $100,526 to $191,950 $100,501 to $191,950 32% $191,951 to $243,725 $383,901 to $487,450 $191,951 to $243,725 $191,951 to $243,700 35%  $243,726 to $609,350 $487,451 to $731,200  $243726 to $365,600 $243,701 to $609,350 37%  Over $609,351 Over $731,201  Over $365,601 Over $609,351 Now that you have the table before you, let’s help you understand how taxes are calculated with an example. Let’s assume that you are a married person filing jointly with a total taxable income of $100,000. This is how your tax will be calculated: Tax Rate Tax bracket Income Total tax owed 10% $23,200 or less  $23,200 $2,320 12%  $23,201 to $94,300 $71,100 $8,532 22%  $94,301 to $201,050  $5,700 $1,254 Total tax owed $100,000 $12,106 In the above case, the marginal tax rate would be 22% since this is the bracket under which your last dollar is taxed. However, as you can see, the effective tax rate is just over 12%, since you only pay a tax of $12,106 on a total income of $100,000. Marginal Tax Rate vs Effective Tax Rate – Why Understanding Both Matters? Understanding both the marginal and effective tax rates is essential for effective tax planning. Knowing your marginal rate helps you make informed decisions about earning additional income, tax deductions, and investments. Meanwhile, your effective tax rate gives you an overall picture of your tax burden. It’s useful for budgeting, comparing tax burdens year-over-year, and understanding your true financial obligation.  For example, if you’re considering taking on additional work or investing in income-generating assets, knowing your marginal tax rate will help you estimate the tax impact on that extra income. At the same time, knowing your effective tax rate can guide you in making decisions about tax-saving strategies, such as contributions to retirement accounts or charitable donations. The Bottom Line Understanding the difference between effective and marginal tax rates can greatly help you understand how much taxes you owe to the authorities and make filing returns easier. However, should you need expert advisors to aid decision-making, Knowvisory’s Tax Consultants are just a click away. Reach out to us to ensure your taxes are managed efficiently and effectively. We can not only help you prepare your returns, but also assist you in minimizing your tax liability, identifying potential savings opportunities, and planning for future tax obligations. Contact us today and navigate your year-end taxes successfully.

Taxes can be confusing, but knowing them is essential for managing your finances effectively and staying compliant with government regulations. In this article, we explore the two most common tax categories so that you can understand your taxes better. Two of the most common types of taxes that individuals and businesses encounter are payroll taxes and income taxes. Although both are essential to government funding, they serve different purposes and have unique implications for individuals and businesses alike.  Let’s break down the key differences between payroll and income taxes, understand how they impact your financial situation, and gain insights into why efficient tax planning and preparation is so important. What is Income Tax? Income tax is the total tax you owe to the government and is calculated on your income. It is assessed at the federal, state, and local levels. Income tax is typically levied on various forms of income, including wages, salaries, bonuses, dividends, interest, and other earnings. The amount of income tax you owe depends on your taxable income, which is your gross income minus any tax deductions, exemptions, or tax credits that you are eligible to claim. Income tax rates can vary significantly depending on your income level and the tax bracket you fall into. The federal government uses a progressive tax system in the United States, meaning that higher income levels are taxed at higher rates. On the other hand, state and local income taxes can either be progressive or flat, where everyone pays the same rate regardless of income. As of 2023, only 9 US states do not impose any state-level income tax. These are Alaska, Florida, Nevada, South Dakota, Texas, Tennessee, Washington, Wyoming, and New Hampshire (excluding dividends and interest). Also, as an employer, you are required to withhold a portion of your employee’s wages as income tax and pay it to the tax authorities. However, individuals are still responsible for filing their income tax returns and paying any additional taxes owed or receiving a refund if they have overpaid. What is a Payroll Tax? Payroll taxes are taxes that employers are required to withhold from employees’ wages and pay on their behalf to the government. These taxes are used to fund social insurance programs, including Social Security and Medicare in the United States. Additionally, employers pay taxes such as FUTA (Federal Unemployment Tax Act) without any employee contribution. Below are some key components of payroll tax: Social Security Taxes: Whether you are an individual or a business, you must pay a certain percentage of the wages as social security tax. This tax is part of the Federal Insurance Contributions Act (FICA). In 2024, both employers and employees will each contribute 6.2% of taxable wages toward Social Security, up to a limit of $168,600, compared to $160,200 in 2023, totaling 12.4% of the total taxable wages. The wage base limit may be adjusted annually by the government. Medicare Taxes: Medicare taxes fund the Medicare program, which provides health insurance for individuals aged 65 and older and younger people with disabilities. Each employee and employer must pay 1.45% of total taxable wages, with no wage limit. An additional 0.9% Medicare tax applies to high-income earners. For further details on the Medicare taxes, visit https://www.irs.gov/taxtopics/tc751 Federal Unemployment Tax Act (FUTA): Employers pay this tax to provide unemployment compensation to workers who have lost their jobs. The FUTA tax is paid solely by the employer and is not deducted from an employee’s wages. The federal rate is currently at 6% on the first $7,000 paid to the employee. Employers can receive a credit of up to 5.4% if they pay state unemployment taxes, reducing the effective FUTA rate to 0.6%. State Unemployment Taxes (SUTA): Similar to FUTA, state unemployment taxes are paid by solely by employers to fund state unemployment benefits. Each state sets its own tax rates and wage base limits. Additional Withholdings: In some cases, there may be other payroll taxes or withholdings, such as those for state disability insurance or local taxes. However, they depend on the location and specific requirements. Payroll taxes are mandatory taxes that play a crucial role in funding social safety nets. Employers are responsible for calculating, withholding, and remitting these taxes to the government, and failure to do so can result in tax penalties and interest charges. Understanding payroll taxes is essential for both employers and employees to ensure compliance and proper financial planning. Income Tax vs Payroll Tax: The Key Difference The table summarizes the key differences between these two tax categories: Components Payroll tax Income tax Purpose of the Tax Primarily used to fund social insurance programs like Social Security and Medicare. Used to fund a wide range of government services, including national defense, infrastructure, and public education. Who pays the tax? Shared between employers and employees. The employer withholds the employee’s share from their paycheck and matches it with an equal contribution. Paid entirely by the individual or business. Employers may withhold estimated income taxes from employee paychecks, but the final responsibility for payment lies with the taxpayer. On what is it calculated? On employee wages and salary On all income types including income from business and other sources Tax Caps and Exemptions Only the first $168,600 of income is subject to Social Security tax (as of 2024). Medicare taxes apply to all wages with no limit on wages. No cap on taxable income. All earned and unearned income is subject to taxation. Why Understanding the Difference Matters? Payroll taxes and income taxes are both integral to the functioning of government programs and services, but they serve different purposes and affect taxpayers in distinct ways. By understanding the key differences between these two types of taxes, individuals and businesses can better manage their financial obligations and take advantage of any available tax benefits. For employees, knowing payroll taxes is important as it affects the take-home pay and can help in retirement planning and other long-term financial decisions. For employers, understanding these taxes is essential for

Whether you’re paying for preschools, summer day camps, after-school programs, or daycare, childcare expenses can take up a large slice of your income. The good news is, that the IRS enables you to offset some of these expenses through the Child and Dependent Care Tax Credit. Let’s see what it is and how it can help you save up on your childcare expenses as well as your tax bill. When it comes to reducing your tax bill, understanding tax deductions is important. The Child and Dependent Care Tax Credit is one such federal tax benefit that’s designed to provide financial relief to families who pay for the care of a child or dependent while they work, look for work, or attend school. This credit can be applied to a wide range of care expenses, including daycare centers, in-home care, and summer day camps for children under the age of 13. This credit helps in efficient tax planning and helps you reduce the amount of taxes you owe. Eligible taxpayers can claim this credit when they file their year-end returns. The CDCTC can be claimed by both married and single taxpayers. Who Qualifies for the Credit? You qualify for the Child and Dependent Care Tax Credit, if you provide: What is the Eligibility Criteria? How Much is the Child and Dependent Care Tax Credit Worth? Aspect Details for One Qualifying Person (Child/ Dependent) Details for Two or More Qualifying Persons (Children/ Dependents) Maximum Eligible Expense $3,000 $6,000 Percentage of Expenses Covered 20% – 35% 20% – 35% Maximum Credit Value Up to $1,050 (35% of $3,000) Up to $2,100 (35% of $6,000) Income Considerations Higher income = lower percentage (down to 20%) Higher income = lower percentage (down to 20%) The amount of tax credit you can claim varies based on your income and the number of dependents in your care. Here’s a breakdown of how much the credit is worth: How is the Credit Calculated? The amount of the Child and Dependent Care Tax Credit is based on a percentage of the qualifying care expenses. The percentage varies depending on the taxpayer’s income but generally, it is calculated as: What Expenses Qualify? The credit can be applied to a variety of work-related care expenses, including: However, it’s important to note that overnight camps do not qualify for this credit, as they are considered non-work-related expenses. Similarly, care expenses during leisure do not qualify for this credit. For example, the salary paid to a babysitter to watch your kids while you go out for dinner does not qualify for child and dependent care tax credit. That’s because this babysitting fee didn’t help you to work. Is the Child and Dependent Care Tax Credit Deductible? No, the Child and Dependent Care Tax Credit is not deductible. Instead, it is a tax credit and directly reduces the amount of tax you owe, dollar for dollar. Unlike a deduction, which only reduces your taxable income, a tax credit is applied to your actual tax liability, making it more valuable in reducing your overall tax bill. This means if the credit is more than your tax liability, you cannot receive a refund for the difference. For example, if you owe $2,000 in taxes and qualify for a $1,000 Child and Dependent Care Tax Credit, your tax bill would be reduced to $1,000. This credit can provide significant relief for eligible taxpayers, especially those who have substantial child or dependent care expenses. How to Claim the Credit? Claiming the Child and Dependent Care Tax Credit requires some extra paperwork. You need to complete Form 2441 and submit it with your Form 1040. However, claiming this tax credit may affect your ability to claim other tax credits and vice versa. That’s why it is important to consult a Tax Expert before filing to check on the other alternatives and benefits available. Professional tax consultants can help you maximize your credits while staying compliant with all tax regulations. Need help navigating the complexities of tax credits? At Knowvisory Global, we can help you understand your eligibility requirements and guide you on ways to maximize credit and minimize IRS tax penalties. We handle all your paperwork, so you can focus on what matters most! Contact us today and make the most of your tax benefits. We can help you stay sorted and prepared for the upcoming tax season.

Do you think your work ends with filing your tax returns? It may not. In this article, we delve into the types of issues you could face as a taxpayer even after filing your annual returns and how to resolve them. The IRS routinely conducts tax audits to augment its tax collection efforts. If they find any discrepancy in your return, they could send you a notice asking for quick remedial action. That’s why accurately filing your tax return is important! Here are a few reasons why the IRS could send you a notice on your tax return and what you can do to save yourself from hefty fines and penalties. Types of tax problems Tax penalties We already took a deep dive into different types of tax penalties you could face a few days ago. The tax authorities could seek a penalty if you have made a mistake in filing, reporting, or paying taxes. The typical consequences are that you may be asked to pay a fine and rectify the return. As we saw earlier, over 80% of such notices are for failing to pay taxes or for paying an incorrect amount. How to resolve it? Several remedial measures are available, including appealing for a reduction or waiver of penalty with the help of tax experts, if needed. Unpaid taxes If you have forgotten to pay your taxes or paid less than the specified amount, you can be hit with a 0.5% penalty for every month. Any balance to be paid is also subject to interest. If you fail to address the situation, interest and penalty will continue to accumulate. How to resolve it? Some options available include a long-term payment plan that allows you to pay the taxes in monthly installments without the added burden of interest. Alternatively, you can explore an offer in compromise. Math-error notices Filing taxes can be a complex affair, especially if you are doing it by yourself. There is a lot of scope for simple computational errors, missing entries, and incorrect values. In many such cases, the IRS corrects the error and processes the return without you having to do anything. However, in some cases, they may send you a notice requiring action on your part. How to resolve it? Solutions depend on the kind of math error reported. You may need to pay more taxes or receive a refund where applicable. Non-filing of taxes You will receive an IRS notice if you have missed the tax filing deadline. The notice could demand a penalty for non-filing of returns if the tax authorities deem it fit. How to resolve it? Filing returns is essential to resolve this issue, with a full payment of taxes owed where applicable. Underreported income If you have failed to declare any income, this is considered underreported income and the IRS can send you a notice to remedy the situation. This happens when the income reported on your tax return fails to match with income consolidated from third-party sources. How to resolve it? Additional payment of taxes and/or penalties may be needed to remedy this notice. If in doubt, consult a Tax Expert for advice. This is not an exhaustive list of tax problems you could face after filing your return. If you get a tax notice, the best thing to do would be to work with the authorities and/or Tax Experts at KnowVisory and resolve it at the earliest. Whether you need expert advisors to aid decision-making or help in preparing your returns, Knowvisory’s Tax Planning & Return Preparation services are here to help. We can help you understand your tax deductions, and liabilities, and optimize your tax strategy for maximum savings and benefits. Contact us today and get expert help in filing your tax returns.

Applying deductions can help you reduce your tax bill. In this article, we help you understand what type of deductions to choose. Did you know that as a taxpayer, you can reduce your tax bill in some ways? Let’s start with the basics. Your income tax is calculated on your Adjusted Gross Income (AGI). However, the IRS allows you to claim certain deductions from your AGI, to help you reduce your tax burden. You can either claim a standard deduction or choose to itemize the deductions if you believe that your actual expenses may be higher than the standard deduction. Let’s break it down for you. Standard Deduction The standard deduction is a flat reduction in your Adjusted Gross Income stipulated by tax authorities. This amount is fixed by Congress and changes year on year, usually getting bigger. The standard deduction amounts per the IRS for the 2023 tax year are: Single or Married Filing Separately – $13,850 Married Filing Jointly – $27,700 Head of Household – $20,800 Itemized Deductions The IRS allows certain categories of expenses to be deducted from your AGI that decreases your taxable income and therefore, your tax bill. When you choose to itemize your deductions, you can pick from a list of individual deductions instead of opting for a flat reduction. Types of Itemized Deductions The IRS provides a wide range of permissible expenses that can be deducted from your AGI to reduce your tax bill. We list some of the most common itemized deductions. Unreimbursed Medical and Dental Expenses If you have spent any money for medical or dental treatment for yourself or immediate family members, it may qualify as an itemized deduction if the total out-of-pocket spend exceeds 7.5% of your AGI. You can either claim this when the treatment is provided or when the expense is incurred. The amount to be claimed during the year is the amount paid (by cash/check or credit card) less the reimbursed portion by the employer/insurance company, only to the extent it exceeds 7.5% of AGI. Interest Expense 1.    Home Mortgage Interest If you are a homeowner, you can claim deductions for the interest expense incurred either for your main or second home. Loans of up to $750,000 secured by the home and used to buy, build, or substantially improve taxpayers’s homes are deductible only to the extent paid and related to the current period. This is applicable if you are filing taxes jointly with a spouse. In case you are filing as an individual, this cap is reduced to 375,000. 2.    Investment Interest Expense Interest paid or accrued on a loan or part of a loan that is allocable to property held for investment (Property that produces income from interest, dividends, or annuities; provided the income is not derived in the ordinary course of business. It includes interest expense from Schedule K-1 received from S-Corp, Partnerships, estates & trusts. Interest expense to purchase tax-free bonds is not deductible. Unused may be carried forward indefinitely. 3.    State & Local Tax (SALT) Deduction The SALT (State and Local Tax) deduction allows taxpayers in the United States to deduct certain state and local taxes, such as property taxes and either income or sales taxes, from their federal taxable income. However, the Tax Cuts and Jobs Act of 2017 capped this deduction at $10,000 4.    Charitable Donations  Good deeds can fetch you some tax benefits too. If you have donated to a qualified domestic organization, you can claim up to 60% of AGI. Contributions can be paid in the form of cash/check or Property. How to Choose Between Standard and Itemized Deductions? Running tax calculations with both options is a good idea when you are faced with the decision of whether to itemize your deductions. If the total value of itemized deductions is higher than the permitted standard deduction for the tax year in question, then you can choose to itemize. How Does It Help to Itemize Your Deductions? As we said before, itemizing deductions may add up to more than the standard deduction permitted by law. The more you deduct, the less you pay in taxes. If you think your expenses under some of these categories could exceed the standard deduction, itemizing deductions can be advantageous. Are There Any Disadvantages? Like for everything else, itemizing your deductions is more time-consuming and can mean that you spend more time on your tax return. The rules can be confusing and you will need to understand them in depth to be able to maximize your tax savings. Additionally, it is a good idea to keep documentary evidence for all deductions you are claiming as the IRS may choose to audit your return at any time. Make an Informed Decision! Whether you choose to claim standard deductions or itemize them, do your research, understand the tax laws, and run simulations before making a decision. Connect with expert advisors for informed decision-making. By consulting with professionals, you can ensure that you maximize your tax savings and comply with all relevant regulations. Don’t leave money on the table—take the time to evaluate your options and leverage Knowvisory’s Tax Planning & Return Preparation services to make the best decision for your financial future. Contact us today for expert guidance and start optimizing your tax strategy now!  

Who doesn’t find filing tax returns a daunting task? We decode penalty clauses for you and help you avoid or reduce tax penalties. More than half of all penalties imposed are for not paying taxes on time. But hold on. Even if you do pay taxes on time, but have missed a tax filing deadline, you can still receive a penalty notice. Why might I receive a penalty? Here are some reasons why the IRS might send you a penalty notice. There are several reasons why you may be asked to pay a penalty, but these are some of the most common ones. But wait, all is not lost. There are ways in which you can legally avoid or reduce tax penalties. In this article, we simplify complex tax laws and help you understand what you need to do to reduce your tax liabilities. Before we dive into the remedial actions for reducing tax, let’s take a minute to understand the most common reasons why you might be asked to pay a penalty. Failure to Pay The IRS usually requires you to pay the tax by the April deadline. When you fail to meet this deadline, the IRS can levy a penalty. This penalty is usually 0.5% of the tax you owe per month or part of a month, but it also caps at 25% of the tax due. One way to minimize your penalty is to ensure that you pay your tax in full by the April deadline, even if you request an extension. Failure to File The Failure to File penalty applies if you don’t file your tax return by the due date. The Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. However, the penalty won’t exceed 25% of unpaid taxes. If both the late filing and late payment penalty apply to a particular month, the late filing penalty is reduced to 4.5%, so the maximum penalty is 5% pm. Failure to pay proper estimated tax The IRS expects that you will pay taxes throughout the year, rather than at the end of the year as a lump sum. To facilitate this, it sets quarterly deadlines (April, June, September, and January). You can calculate tax and adjust the amount deducted from your paycheck as you go to help reduce your penalty. The requirements are that you pay: Dishonored check If you issue a check to the IRS and you do not have enough money in your checking account, the bank will dishonor or “bounce” your check. The IRS charges a penalty Bad Check Amount Penalty Less than $1,250 The payment amount of $25, whichever is less $1,250 or more 2% of the payment amount A simple way to reduce your penalty is to ensure that your checking account is adequately funded when you issue a check to the IRS. How do I avoid or reduce tax penalties? The IRS itself offers some legal ways to reduce your tax penalties. Let’s take a look at three basic scenarios in which the IRS might agree to reduce your penalties. First-time abate or administrative waiver Are you usually on top of your tax filing responsibilities? Even the most meticulous tax filers miss deadlines sometimes. If this sounds like you, you can file a request for first-time abate. To qualify, you must have filed all your returns, paid your taxes on time, and have no prior penalties for the last three years. Reasonable clause Sometimes, you might fail to pay taxes on time or make an incorrect payment due to a wide range of reasons. The IRS allows you to cite some of these as “reasonable clauses” and request a penalty waiver. Some valid reasons for filing an exemption on a reasonable clause basis are: Statutory exceptions In very rare cases, the IRS also provides statutory exceptions under a certain set of circumstances. If you fall under any of these categories, you can request a reduction/removal of penalties. So, here you are! These are some of the common reasons why you might receive a tax notice from the IRS along with the ways to avoid or prevent it. Whether you are an entrepreneur, a small business owner, or an individual taxpayer, staying on top of your taxes is not easy. Seek help from our seasoned tax experts and we can guide you step by step. We can help you calculate and file your taxes as well as provide personalized strategies to minimize your liabilities. Reach out to us today for expert help.