The acronym FIT stands for Federal Income Tax, a tax on any legal entity. This tax applies to the yearly earnings and incomes of these legal entities. It includes all sources of earnings, including salaries, wages, monetary prizes, tips, unemployment benefits, and gambling winnings.
As this income tax is the major source and means of revenue for the Feds, almost all states are obligated to withhold this income tax except for a few exceptions.
How Do I Lower My Tax BRACKET?
The government determines your tax liability based on taxable income. Your income is divided into segments that are called tax brackets, and every single segment is given an appropriate state-sanctioned tax rate.
The positive aspect is that regardless of the tax bracket you fall into, you will not be subject to that tax rate on your total income.
Tax credits and deductions are the two primary methods available to citizens of the United States for lowering their overall tax liability.
1. Tax Credits
Earning tax credits is an effective way to save money. They help lower your overall payable tax amount. Let's say, for instance, you are taxed $5000, but you are eligible for a tax credit of $1000; you can pay just $4000 instead of the initial $5000. The US taxpayers have several options for tax credits available to them.
2. Tax Deduction
Tax deductions reduce the portions of your income that are subject to taxation. However, tax credits help decrease the total amount of money you owe in taxes.
Once you have enough deductions, you can itemize your filing status. This will reduce your income. Suppose your medical bills exceed 7.5% of your approximated net earnings. You are eligible to subtract those expenses and lower the portion of your income subject to taxation.
Exceptions to the Federal Income Tax
Nine states do not subject their residents to an income tax:
New Hampshire: Individuals from New Hampshire only need to pay income taxes on the interests they receive and their dividend incomes.
Washington: Only individuals in Washington who have high incomes are subject to a withholding tax.
How Do I Better Understand FIT?
The US taxing system is progressive; this means that individuals with more income will automatically get shifted to higher federal income tax brackets.
1. Be Smart
If you are within a particular tax bracket, it does not necessarily mean that you are subject to the tax rate applicable to that bracket on all your income.
This is because of how taxes are structured; individuals with more income are subject to increased tax amounts. And individuals with lesser taxable amounts are subject to limited federal income tax rates thanks to the dynamic tax system.
2. Calculating Your Taxes
Your effective tax rate is the amount of tax you owe as a proportion of your income subject to taxation.
To calculate your effective tax rate, take Form 1040 and divide line 16 by line 15. Line 16 is the total amount of tax an individual owes, and line 15 is the amount of income on which tax can be imposed.
3. Rinse and Repeat
The levels of income that trigger different tax brackets are adjusted every year. In addition, several provisions under the tax code, such as the income thresholds that determine the federal tax rates, are modified annually to reflect the inflation rate.
The purpose of this indexing is to protect taxpayers against the phenomenon known as "bracket creep," which refers to the gradual movement of a person into a higher tax band due to inflation.