Income Tax

• Every year, you typically pay a certain amount of money to the Internal Revenue Service based on how much money you made. If you work for an employer, part of your income taxes are withheld from your paycheck and sent to the IRS. If you are a business owner or self-employed, you have to make quarterly tax payments. The amount of income tax that you pay is calculated by multiplying your taxable income by the appropriate marginal tax rate.
  
  

Reducing Taxable Income

• Since your tax liability is ultimately determined by how much your taxable income is, reducing this income is essential to save money on taxes. To calculate your taxable income, you can take the total amount of money that you earned for the year and then subtract tax deductions from that amount. For example, you can deduct things like the amount of money that you pay for mortgage interest and any business expenses from your income to come up with your taxable income.
  
  

Tax Credits

• After you calculate your taxable income, tax credits can lower the amount of money that you have to pay the IRS even further. With a tax credit, you get to lower your tax liability on a direct basis. With tax deductions, you lower your tax liability indirectly because you are lowering your taxable income and then multiplying that by your marginal tax rate. With a tax credit, you calculate the tax liability and then subtract from that amount. The tax credit is a dollar-for-dollar reduction of your taxes.
  
  

Calculating Taxes

• The business of calculating tax credits and tax deductions can be confusing if you do not know how to file your taxes. In this case, a number of options are available to help you calculate your tax breaks. For example, many people in this situation use tax software to help calculate fill out their tax return and calculate their tax liability. If you do not feel comfortable doing this by yourself, you can work with a professional tax preparer to help you calculate your taxes.