3 Ways to Reduce Taxes
The objective of tax planning is to arrange your financial affairs so as to minimize your taxes. These three basic methods can reduce your taxes, and each method might have several variations. It is possible to reduce income, increase deductions, while taking advantage of tax credits.
A key element in determining taxes is the Adjusted Gross Income or (AGI). There are many things which depend on your AGI (or modifications to your AGI), your tax rate being one of them. AGI even impacts your financial life outside of taxes: banks, mortgage lenders, and college financial aid programs ask for your adjusted gross income, a key indicator of your finances.
Because of the importance of the adjusted gross income, you may want to begin your tax planning here. What goes into your adjusted gross income? AGI is income from all sources minus any adjustments. Remember, the higher the total income the higher the adjusted gross income.
As you can guess, the more money you make, the greater the tax liability. Conversely, the less money you make, the lower the tax liability. The best way to reduce taxes is to lower your taxable income. And the best way to lower your taxable income is to contribute money to a 401(k) or similar retirement plan. Your contribution reduces your taxable wages, and lowers your tax bill.
You may be able to reduce your Adjusted Gross Income through various adjustments to income. An Adjustment to your income is a deduction; however, you don’t have to itemize them. Instead, you take them on page 1 of your 1040 and they will reduce your Adjusted Gross Income. Adjustments include things such as a contribution an IRA, student loan interest paid, alimony paid, or classroom related expenses. A list of all qualified adjustments can be found on Form 1040.
The best ways to boost your adjustments is to contribute to a traditional IRA, either through a 401(k) at work or through a traditional IRA plan. Contributions to these plans can reduce both your taxable income, as well as, your taxes.
Increase Your Tax Deductions
Taxable income is a key factor in determining your overall tax liability. After you have reduced your AGI, taxable income is the result. Most filers can take a standard deduction, and some people are able to itemize their deductions.
Itemized deductions include expenses for items such as health care, state and local taxes, property taxes, mortgage interest, gifts to charity. A key tax planning strategy is to keep track of itemized expenses throughout the entire year. Your standard deduction and personal exemptions depends on your filing status and the number of dependents you have.
The best strategies for reducing your taxable income are to itemize your deductions. The three largest deductions are for mortgage interest, state taxes, and gifts to charity.
Take Advantage of Tax Credits
Now that we’ve fixed our taxable income, it is time to focus on tax credits. Tax credits will reduce your tax. There are tax credits for college expenses, saving for retirement, even adopting children.
The adoption of a child and college expenses provide the best tax credits are for. Most of us are not in a position to adopt a child, however, a lot of us could take some college classes. The Hope Credit is for students in their first two years of college, and The Lifetime Learning Credit are two education-related tax credits for anyone taking college classes. These classes do not have to be related to your career.
Avoid early withdrawals from your IRA or 401(k) retirement plan. The amount you withdraw will become part of your taxable income, and on top of that there will be additional taxes to pay on the early withdrawal.
A great tax credit and also the most abused is the Earned Income Credit (EIC). Unlike other tax credits benefits, the EIC is credited to your account as a payment, and that means EIC often results in a tax refund even, if the total tax has been reduced to zero. Filers may qualify for the earned income credit even if you earn less than a certain amount.
Increase Your Withholding, avoid owing money to the IRS at the end of the year by increasing your withholding. Increase the amount of money taken out of your paycheck throughout the year, so you’ll get a bigger refund when you file your taxes.
Contact Grobe & Associates for helpful advice on reducing your taxes, set up an appointment with one of our certified public accountants today at 608-210-1200. We look forward to meeting your accounting needs and making improvements to your budget.