When thinking about filing your income tax return on April 15th, you realize that the process is not as simple as multiplying your earned income by a tax rate percentage. The Internal Revenue Code (IRC) is complicated, with all types of rules and regulations that individuals can use to legally reduce their tax liability. There are exemptions, credits, and a multitude of other laws that are part of this process. Everyone’s tax experience is unique and dependent upon life experiences that result in different tax laws being used for different situations and different taxpayers. It is imperative that tax professionals and individuals know the law. Learning to use tax laws effectively can help people prosper by lowering their tax liability. Congress adds new laws and revises old laws in the IRC each year to collect enough funds to operate the federal government annually. Even though there are taxes to be collected, there are also individual and business deductions, credits, and incentives built into the IRC to help U.S. taxpayers grow and prosper. For example, it is important for all U.S. individual taxpayers to be able to save for their future and their retirement. Within the IRC, incentives are used to help individuals purchase homes, invest in assets, and fund retirement savings accounts. Investing in assets results in the sale, disposition, or different use of these assets as time passes. When the time comes, it is important for taxpayers to understand the tax code regulations that apply to an event so that they can answer important questions about their tax choices. 

For example, the purchase of a residence could result in a gain or loss when the home is sold. Is all of this gain taxable? Can the loss be deducted from other income on the tax return?

 What about changing the residence into a rental property—what are the tax implications? 

What about taking money from a retirement account? Are the funds taxable or are they excluded from tax? What are the rules? 

By looking ahead and analyzing tax situations before they happen, taxpayers can make better choices that can result in better tax consequences. Taxes affect you your entire life. Learning how to avoid taxes by using the IRC to your advantage is essential to your financial success. Eligible taxpayers have several deadlines by which they can make contributions to their individual retirement account (IRA). According to tax law, what is the deadline for making these contributions? Taxpayer distributions from traditional 401(k) plans are taxed as ordinary income. What type of plans are not taxed as ordinary income?

Answer rating: 100% (QA)

a The purchase of a residence could result in a gain or loss when the home is sold Is all of this ga... View the full answer