There are plenty of ways you can reduce your taxes and your stress during tax time. There are three specific methods that have been proven to work in many instances. If you take time to plan your taxes you can save money in ways you may have
1. Reducing Income- Adjusted Gross Income (AGI) is an important key element in determining your taxes. Lots of other modifications to your AGI can be made. Tax rate and various tax credits can modify your AGI. It even impacts your financial life outside of taxes: Banks, mortgage lenders and college financial aid programs routinely and often ask for your adjusted gross income or AGI. This is a key measure of your financial situation.
Because of the importance of your AGI you may want to begin planning tax here. You may want to know what exactly goes into your AGI in order to start planning your taxes here. Your AGI is your income from all of your sources minus any adjustments made to you income. The higher your total income, the higher your AGI. As you can guess, the more you make the more taxes you pay. The less you make, the less taxes you pay. Then it would make sense that the number 1 way to reduce your taxes is to reduce your income. The best way to reduce your income is to put it into a 401(k) or similar retirement plan at work. Your contribution reduces your wages and lowers your tax bill.
Reducing your income isn’t the only way to lower your AGI. Adjustments are deductions but you don’t have to itemize them on the Schedule A. Instead take them on page one of your 1040 and they reduce your AGI. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid and classroom related expenses. A full list of adjustments can be found on form 1040, page 1, lines 23 through 34. The best way to boost your adjustments is the contribute to traditional IRA.
Two of the best ways to reduce your AGI tax then is to save for retirement through a 401(k) through work, or through a traditional IRA plan. This will lower your taxable income, and thus lower your taxes.
2. Increase your Tax Deductions
Taxable income is another key element in your tax crisis situation. Taxable income is what’s left over after you have reduced your AGI by deductions and exemptions. Almost everyone gets a standard deduction and some people are able to itemize their deductions and receive more money.
Itemized deductions can include expenses for health care,state and local taxes,property tax (car registration fees), gifts to charity, job-related expenses, tax preparation fees, and investment related expenses just to name a few.
A second key strategy to planning your taxes is to keep track of your itemized deductions through the year using a spreadsheet or personal finance program. You can then at the end of the year compare your itemized expenses with the standard deduction. You can then take the higher of the two saving yourself money and time at the end of the year.
Your standard deduction and personal exemptions depends on your filing status and how many dependents you have as well. You can get an increased standard deduction by getting married or having more dependents. The best strategy to reduce your taxable income is to itemize your deductions. The three biggest deductions are mortgage interest, state taxes and gifts to charity.
3. Take Advantage of Tax Credits
Once we have fixed our taxable income, we should change our attention to various tax credits. Tax credits reduce your tax. There are tax credits for college expenses, for saving for retirement and for adopting children.
The best two are adoption and college expenses. Not everyone is in a position to adopt a child but everyone can take college classes. There are two education-related tax credits. The Hope Credit is for students in their first two years of college. The Lifetime Learning Credit is for anyone taking any college classes. The classes do not have to be career related.
If you always want to avoid additional taxes, avoid early withdrawals from IR and 401(k) plans. The amount you withdrawal will become part of your taxable income and there will be other taxes to pay for early withdrawal.
There is also a Earned Income Credit (EIC). Unlike other credits, the EIC is credited as payment. That means the EIC often results in a refund even if the tax has been reduced to zero. You can get this credit if you earn less than a certain amount.
4. Increase your Withholding
At the end of the year you can avoid owing any additional taxes by increasing your withholding. The more money you take out of your paycheck throughout the year, the bigger refund you will get and the less you will have to pay at the end of the year.
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