January brings another year with new tax laws which means tax documents will be soon arriving in the mail to get ready for the upcoming tax season. Our conversation reviews common misconceptions, new tax laws to be aware of, and tips from The Taxanista to reduce your tax stress and better understand some of the terminology around personal income tax filing.
A few common misconceptions:
1. Our income tax system is tiered so not all of your income is taxed at your highest tax rate. Because of that, it is important to understand you effective tax rate (which is a blend you’re your income tax brackets) and not just focus on your marginal tax rate (the highest tax rate applicable to your personal income).
2. Completing the W-4 form, Employee’s Withholding Certificate, has become more complicated with the new tax laws in place so look at the form and possibly use the IRS calculator to help you determine the tax withholding from your wages https://www.irs.gov/pub/irs-pdf/fw4.pdf .
3. Understanding the difference between a tax deduction, which reduces your taxable income (and lowers the amount of tax owed) whereas a tax credit reduces the actual tax owed, dollar for dollar, can be helpful in understanding the importance of taking advantage of the Arizona State Tax Credits.