Tax that should be paid of the employees is based on their income. In the United States, employees pay taxes through the progressive tax system. It means the higher the income, the higher the amount of tax that should be paid. Taxes are also commonly deducted from paycheck of the employees by the employers (Bernard, 2009). In some cases, employees view tax as a burden due to the high amounts of paper works. However, most of them do not consider lowering their tax burden. Annual tax bill could be legally reduced in several ways. In most cases, lowering the annual tax bill involves lowering the gross income or the taxable pool of money which was earned by the employee (Sisolak, 2017).
One way of reducing the taxable pool of money which was earned by the employee is to consider tax exclusions (Branch, 2014). Tax exclusion is a form of compensation which is not included as income earned by the employee. Some of the earned income is excluded due to the difficulty in quantifying or due to the contributions of the employees for plans and other activities. When these are excluded from the taxable pool of money, the amount of tax that should be paid by the employee is also reduced (Bernard, 2009). Some of the tax exclusions include contributions to the retirement savings plan which are sponsored by the employer and health insurance.
Another way to reduce the tax burden for the employees is to adjust their income through above-the-line deductions. These deductions could be recognized above the gross income which is adjusted at the tax return (Sisolak, 2017). Employees could exclude these deductions to their gross income in order to reduce their tax burden. These deductions include interests from student loan, contributions to retirement program and moving expenses (Branch, 2014).
On the other hand, below-the-line deductions or standard deductions could also reduce the taxable income if it is subtracted by the employees in their tax return. Standard deductions could be based on the employee’s status (Sisolak, 2017). The consideration of the standard deductions could result to the eligibility of the employee to subtract itemized deductions in their taxable income. The employee could be eligible to deduct itemized deductions in their taxable income if their individual deductions are more than the standard deductions (Bernard, 2009). Some of the itemized deductions include contributions to charity, expenses related from work, mortgage interests, losses due to theft and losses due to casualty (Branch, 2014).
Another way to reduce the tax burden of the employee is the consideration of the tax credit. Tax credit could be directly deducted to the amount of tax owed to the government. If the employee has no tax owed, tax credit could also be refunded (Branch, 2014). Tax credits could be in the form of education credits, earned income tax credits and the costs that the parents incur for the health care or education of the child.
In general, reducing the tax burden of the employees involves considering or maximizing tax exclusions, tax deductions and tax credit. These activities could require effort for the employees. However, their efforts could be beneficial for them since it could reduce the amount of tax that could be deducted from their income or earnings. Employees should always document their activities involving their ways to reduce tax burden in order to avoid potential problems in their tax returns.
References
Bernard, T. (2009). Income Taxes: What You Need to Know. The New York Times. Retrieved from http://www.nytimes.com/2009/01/21/your-money/taxes/primertax.html.
Branch, M. (2014). How to Reduce Last Year’s Tax Bill by 25 Percent. The Huffington Post. Retrieved from http://www.huffingtonpost.com/mike-branch-cfp/how-to-reduce-tax-bill_b_5070387.html.
Sisolak, P. (2017). 5 tips for first-time income tax filers. The Huffington Post. Retrieved from http://www.huffingtonpost.com/policygenius/5-tips-for-firsttime-inco_b_14148220.html.
