“In this world, nothing is certain but death and taxes”, wrote Benjamin Fanklin in 1789. If we taking care of our health and be safety conscious, we may be able to outwit death until we are very old. But for taxes, you can’t escape from paying tax since you start your first job, unless you are very poor. Hence, as a taxpayer, you need to have a good tax planning so that you can legally minimize your tax consequences and pay only what is due to Uncle Sam, not more!

Understanding Your Tax Bracket

The more money you make, the more you pay in taxes. Your tax brackets increase as your income increase. In additional, you loss some of you tax advantages, such as exemptions of dependents, that are phased out as your income increase.

Beside the federal government tax which is unable to be escaped for all taxpayers, if you live in state that also taxes you income, you need to pay for state government tax if applicable. There are seven tax-free states in United States: Alaska, Florida, Nevada, South Dakota, Washington and Wyoming. Hence, you should aware and plan in the additional tax rate if you are living at taxable state. For example if you are in the 25% tax bracket for federal taxes and you live in state that has a 5% income tax, you total tax rate should be 30%. Thus, for every $1,000 you earn, Uncle Sam has his share of $300 living you $700 to spend.

The dollar amount at which tax brackets occur change every year because of factoring in the inflation which vary from year to year. Hence, you should get the most current tax schedule and use it in your tax planning.

How To Legally Pay Less Tax?

There are many tax exemption and deductions benefits offer to taxpayers. You need to know the benefits that apply to you so that you can get some “discount” from Uncle Sam and pay less legally. The deductions and exemptions if you are eligible will help you to reduce your taxable income. Hence, you should get a good tax planning guide which will help you to understand what are the tax’s benefits apply to you.

While a tax deduction is something you subtract from your gross income to reduce your taxable income, tax credit is another tax benefits that you can utilize to minimize you payable tax. Tax credits are actually worth more to you than a deduction. It reduces the amount of taxes you owe, dollar for dollar. Thus, you better get to know the tax credits that can apply to you. Among the tax credits for you to calculate in, if applicable are:

1. Dependent & Childcare Credit

The dependent and childcare credit is available if you work outside your home or are full-time student. The expenses must be for dependents under age 13 or any person who is mentally incapable of care for themselves and they must be qualified as your dependent.

2. Child Tax Credit

If you enjoy this benefit if you have children being supported by if they are under age 17.

3. Education Credits

There are two types of education credits, the Hope Scholarship credit and Lifetime Learning credit. The Hope Scholarship credit is available for the first two years of college of you kids. The Lifetime Learning credit is not just for kids, you can utilize this benefit if you need to take courses to improve your job skills.

4. Adoption Credit

The adoption credit is based on the cost of adoption a child. These costs include reasonable adoption fees, court costs, attorney fees, and legal fees.

5. Earned-Income Credit

The earned-income credit is the only credit given as a payment. The credit is applicable for low-income families, usually with children.

In Summary

You can not escape from paying tax; this is the price of living in a civilized nation. But you can learn more in tax planning so that you can pay less, legally. Uncle Sam will let you living in peace if you just pay what is due to him and you no need to pay more to make him happy.

This is the first of a series of 2007 Tax reference sheets that I’ll be sharing with you over the next month or so. This one focuses on some of the major federal income tax key numbers. I’ll do future ones for estate planning, retirement planning and business planning in the not too distant future so stay tuned.

Since federal income taxes are such a large part of most peoples life or expenditures, I thought that you might like a summary or reference sheet for some of the important figures for 2007.

Many people believe that if someone is in the 28% tax bracket, they pay all taxes due at the rate of 28% of taxable income. This is not correct. A couple having a taxable income of $125,000 does not pay 25% federal income tax on ALL of the taxable income… but only on everything over $63,700. The first $15,650 is only taxed at 10%, the taxable income from $15,560-$63,700 would be taxed at 15% and so on. The figures below is taxable income (after deductions and exemptions).

I’ll start out with the tax brackets for the 2007 tax year.

The figures below show the various “steps” on how the

marginal income brackets are progressively taxed higher.

Married, Filing Jointly:

$zero – $15,650 is taxed at 10%

$15,650 – $63,700 is taxed at 15%

$63,700 – $128,500 is taxed at 25%

$128,500 – $195,850 is taxed at 28%

$195,850 – $349,700 is taxed at 33%

over $349,700 is taxed at 35%

Married, Filing Separately:

Note: Often times it make more sense for a married couple to file taxes separately for either tax reduction strategies or for non-tax reasons. Your tax advisor should help you decide if there are important reasons for YOU to take advantage of this filing status.

Tax brackets for Married Filing Separately: Simply cut the above taxable figures in half for those six tax brackets

Single:

$zero – $7,825 is taxed at 10%

$7,825 – $31,850 is taxed at 15%

$31,850 – $77,100 is taxed at 25%

$77,100 – $160,850 is taxed at 28%

$160,850 – $349,700 is taxed at 33%

over $349,700 is taxed at 35%

Single, Head of Household:

$zero – $11,200 is taxed at 10%

$11,200 – $42,650 is taxed at 15%

$42,650 – $110,100 is taxed at 25%

$110,100 – $178,350 is taxed at 28%

$178,350 – $349,700 is taxed at 33%

over $349,700 is taxed at 35%

Standard Deduction:

Standard Deduction is ONLY for those who do NOT itemize expenses like mortgage interest, charitable contributions, etc.

Married, Filing Jointly: $10,700

Married, Filing Separately: $ 5,350

Single: $ 5,350

Single, Head of Household: $ 7,850

Those who are blind or over age 65 can ADD $1,050 (if married) or $1,300 (if single or head of household) to the above Standard Deductions

Personal Exemptions:

Personal Exemptions are set at $3,400 per allowed person subject to Phaseouts (which are reductions in the Exemptions) based on taxable income. This is not an issue unless your taxable income is at least $117,300 (depending on filing status).

Maximum taxable EARNED income subject to FICA tax: $97,500

The Social Security and Medicare combined tax rate is 15.3% on income up to that figure. W-2 employees pay half of the 15.3% and employers pay the other half. Self-employed pay the whole amount.

Long-term Capital Gains and Qualified Dividend Rates:

For those in the 10% and 15% Income tax brackets only: 5%

For taxpayers in the higher tax backets: 15%

Capital gains on collectibles (coins, stamps, etc.) 28%

One of the important functions of a financial advisor is to help reduce taxes to your legal minimum due by using all appropriate deductions, methods and strategies. A good tax advisor is worth their weight in gold! So go find a pro-active tax advisor, not someone who just files tax returns.

And now, hopefully you will have a better idea of what that person is talking about.

Taxes in California fall into three categories. There are taxes on income, on property, and on sales.

Let us look first at income tax. This is paid on personal income. It is a progressive tax that varies according to the size of the income. There are six tax bands. On the first $6,622 of taxable income 1% tax must be paid. This goes up to 2% for the next tax band between $6,623 and $15,698. The third tax bracket, $15,699 and $24,776, pays 4%. It is 6% on incomes between $24,777 and $34,394 and 8% on incomes between $34,395 and $43,467. Above that level tax is payable at 9.3%.

In addition there is a 1% surcharge on incomes over $1 million. This makes the highest income marginal tax rate 10.3% in California.

Tax returns must be submitted by April 15 every year. They should be made on Form 540EZ, Form 540A (short form), Form 540 (long form) or Form 540-ADS.

Couples can file joint tax returns. In this case the allowances for each tax bracket are doubled.

Sales tax varies across California. In January 2002 it was generally 7.25%. This figure includes state, county and local sales taxes. The state component is 6.25%. But in some cities and counties with their own powers of taxation it may be higher.

What is regarded as taxable may vary from business to business. Gift wrapping may or may not be counted as a taxable item for sales tax purposes. Some businesses treat it as a non taxable item. when food is gift wrapped the gift wrapping service may be taxed but the food itself exempt.

Taxes are payable on real estate in California. But there are many exemptions. Those who think they may be able to claim an exemption should apply to the local County Tax Assessor’s office for information. Some homesteads are exempt from local property taxes. Disabled citizens and senior citizens may be eligible for tax postponement. This applies to their principal residence only. It involves recording a lien against the property. Interest is charged on the postponed tax.There is also an assistance program for eligible home owners and renters. It consists of a once a year payment that is based on a proportion of the tax payable on their homes or included in their rent.

There are no inheritance taxes in California. Estate tax is being brought into line with changes in federal estate tax law and is currently being phased out. For people who died after January 1 2005 there is no need to file an estate tax return.

There are no intangible personal property taxes in California. Only real estate is liable for taxation under California taxation law.

More details can be found on the California Franchise Taxboard Website. The state’s instruction book will explain about the exemptions that are allowable and what refunds can be claimed. The instruction book also explains the program of voluntary fund contributions that can be made by California citizens.

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