By William Cao. Edited by Arjun Chandrasekar.
In this article, two financial concepts named Tax Deductions and Refunds will be dissected and written into a more simplistic and concise manner. It is crucial for one to learn and familiarize themselves with the knowledge behind these two processes due to the many applications U.S. citizens will face as they mature into adulthood and throughout.
Understanding Tax Deductions
Knock, Knock. It’s Uncle Sam coming to collect the tax bill. Ever since the 20th century and more particularly during World War I and II, taxes were put in place due to the fact that the government needed more money to fund and carry out the war efforts. How do they do this? By increasing the income tax among U.S. citizens. That might seem crazy right? What if the citizens could not fully pay the taxes and wanted to somehow reduce the amount of tax they will pay? That is where the term Tax Deductions comes into play.
It is unlike no other that citizens would want to pay the least amount of tax possible when the bill payments come in. Citizens can legally use the method of reducing the taxable income or Tax Deduction. Tax deductions are usually set by government authorities and are often used to lure in taxpayers to participate in community service programs to better society, thus getting a higher tax deduction. Some common deductions can come from personal deductions, mortgage interest, and paying contributions to retirement programs. These tax deductions are actually quite common and every taxpayer in the U.S. is allowed to take some deductions on their tax return. The value of a deduction can be measured by calculating the size of the deduction multiplied by the rate of your marginal tax bracket. For example, if Ethan has $50,000 of income and $10,000 in deductions, he will be taxed on the remaining $40,000. In this case, if his tax rate is 25% then the amount of tax he would save would be equal to $10,000 times 25%, bringing it to $2,500 less than he has to owe to the government.
In the same context of taxes, the term refunds is essentially a reimbursement or the act of paying back a person for an overpayment of taxes by a government taxing authority. For instance, taxpayers receive a refund at the end of the year when they have too much money withheld. If one overpays their estimated taxes, a reimbursement of the money will come their way. The overpayment can be thought of as a loan being made to the IRS without charging interest. A more common application of refunds is in the corporate world, where in a store or a business the customer is unsatisfied with their purchase. They can return their product for the amount of money paid back.
Tax deductions and refunds are a fairly simple concept and can be applied as well as sought after throughout adulthood. If we circle back, a tax deduction is a method to reduce the taxable income by participating in community service programs in bettering the society while refunds are reimbursement of an overpayment of taxes. We have only dived into the basic skin of things where “we have ripped the bandaid” so to say but some advice I can give is to certainly participate in the community service programs to reduce the amount of tax you will pay and to pay the taxes before May 17th.