Financial Literacy for Nurses: What Nurses Should Know about Taxes
The topic of taxes can induce anxiety for most of us. But, as nurses, money management should rank high on our priority list. Many nurses want financial security, and understanding your taxes is a core financial literacy skill. Read on to learn the basics about income tax, including calculating your taxes and reducing the amount you pay.
How To Calculate Your Taxes
Nothing is worse than learning you owe the IRS more money than you thought. By calculating your tax liability ahead of time, you spare yourself surprises come tax season. But before we jump into the math, there are a few tax terms you should know.
Income and filing status
The first term you need to understand is income. It may seem obvious, but it includes both earned income and unearned income. Adjusted gross income (AGI) refers to your income after subtracting deductions, such as contributions to your retirement account.
You have five options for filing status: single, head of household, married filing separately, married filing jointly, or qualifying widow. Your income, along with your filing status, will help determine your tax liability.
Tax credits and deductions
The last terms you need to become familiar with are tax credits and deductions. Credits and deductions may lower your tax liability, but they aren’t exactly the same. Commonly used tax credits include the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC). Tax credits offer more savings than deductions because each dollar amount you get lowers your tax bill by that dollar amount. For example, if your EITC is $3,618, the IRS subtracts the total dollar amount from your tax liability. You can review the complete list of tax credits on the IRS website.
Tax deductions differ from tax credits. You have the option to take a standard or itemized deduction. Your tax bracket or income range will determine the percentage of your deductions. A standard deduction is a fixed amount given to all taxpayers in the same filing status category. For example, the standard deduction for all single filers in 2021 was $12,550. Other variables to consider when taking a standard deduction are age and disability. For example, your standard deduction amount is higher if you are 65 and older or blind.
Unlike standard deductions, the itemized deduction amount varies among individual taxpayers. Itemized deductions require meticulous record-keeping since you must have documentation to support them. Examples of expenses that qualify for itemized deductions will be reviewed later.
Once you have your filing status, taxable income, credits, and deductions squared away, you can calculate your taxes. Online tax calculators are simple to use, and you can find them on any tax preparation service company or investment banking website. As a result, you can learn what you owe without waiting for tax time.
Tax Shelters: Why You Need One
Tax shelters reduce taxpayers’ liability by lowering their taxable income. Shelters include investment accounts, retirement accounts, real estate, and flexible spending accounts. The most common shelter is the employer-sponsored traditional 401k and 403b accounts. Check out this article from the Tax Policy Center. If you want to lower your taxable income, setting up a tax shelter is the way to go.
Annual Tax Deductions For Nurses
You will need to determine what type of deduction you will be taking. If you plan to claim individual deductions on your tax return, you’ll have to go itemized. When planning your tax preparation, keep receipts and supporting documentation for each deduction. The IRS can audit returns filed within three years.
Remember, you can contact a tax professional to help decide which deductions you may qualify to take. Some deductions include, but are not limited to:
professional membership dues
medical and dental expenses not reimbursed by your insurance
charitable donations
individual retirement accounts (IRA)
State tax laws differ, so you should check your state tax board’s website to learn more. And, it's always an excellent idea to consult a tax professional to discover which deductions can lower your tax liability.
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Written by Kimberly Madison MS, BSN, RN
Kimberly Madison is a freelance health content writer with over 12 years of experience as a registered nurse. She creates high-quality blog content, web copy, infographics, and patient education materials for hospitals and health care brands.
