What is my tax rate?
- There are two different tax rates commonly referred to by accountants. The first is your marginal tax rate. Your marginal tax rate is the rate at which you pay tax on the next dollar you earn. The second is your effective tax rate. Your effective tax rate is essentially your average tax rate (the share of your total annual income that you pay in taxes).
How long should I retain tax returns and supporting documentation?
- Under statute of limitations, the IRS generally has three years after the tax-filing deadline to initiate an audit. However, if 25% or more of your income is omitted from a tax return, then this period is extended up to six years. Have you never filed a tax return? If so, then the statute of limitations clock has never started for that tax return; the IRS could go back as far as they’d like to in this case. Based on these circumstances, we recommend keeping all tax returns and associated documents and information for a minimum of six years.
What is the difference between a Tax Credit and a Tax Deduction?
- A tax credit reduces the amount of tax you owe, after the tax has already been calculated. A tax deduction can only lower taxable income that is used to calculate your tax.
What is the difference between a Refundable and Non-Refundable Tax Credit?
- A refundable tax credit can negate all tax you owe on the tax return, and then any residual can be received as a refund. A non-refundable tax credit can only negate all tax owed; and residual is either lost or carried forward to future tax years.