The goal of income tax planning is simple: to minimize your income taxes. There are 3 basic techniques to lower your income taxes, and each method might have variations. You can reduce your income, increase your deductions, and take advantage of tax credits.
Adjusted Gross Income (AGI) is an important element in determining your taxes. Because your adjusted gross income is important, you may want to begin your tax planning here. AGI is your income from all sources less any adjustments to your income. The number one way to reduce taxes is to reduce your income. And the best way to reduce your income is to contribute money to a 401(k) or similar retirement plan at work.
You can also reduce your Adjusted Gross Income through various adjustments to income. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid, contributions to a health savings account (HSA), and classroom related expenses.
Increase Your Tax Deductions
Taxable income is another key element in your overall tax situation. Taxable income is what’s left over after you have reduced your AGI by your deductions and exemptions. Almost everyone can take a standard deduction, and some people are able to itemize their deductions.
Itemized deductions include expenses for health care, State and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses.
The best strategies for reducing your taxable income is to itemize your deductions, and the three biggest deductions are mortgage interest, State taxes, and gifts to charity.
Take Advantage of Tax Credits
Once we’ve tweaked our taxable income, we are ready to focus our attention on various tax credits. Tax credits reduce your tax. There are tax credits for college expenses, for saving for retirement, and for adopting children.
Increase Your Withholding
You can avoid owing at the end of the year by increasing your withholding or making estimated payments. More money will be taken out of your paycheck throughout the year, but you will get bigger refund when you file your taxes.