It’s that time of year again – tax time. While this can be a stressful point in the year, especially for those that are not familiar with the process, there are many ways to help you prepare. Planning for your taxes is a great way to help arrange your financial affairs and minimize your taxes. There are three ways to do this: reducing your income, increasing your tax deductions, and taking advantage of tax credits.
Reducing Your Income
One of the most critical aspects of your taxes is your Adjusted Gross Income (AGI). This is the income you receive from all sources, minus any adjustments. The more money you earn, the more you are taxed. To reduce your taxes, reducing your income is your best bet. To do this, contribute a portion of your paycheck to a 401(k) or another retirement plan through your place of employment if possible. By doing this, you will reduce your wage, resulting in a lower tax bill. You can also reduce your income via various adjustments to income.
Increasing Your Tax Deductions
The income left over after you have reduced your AGI through deductions and exemptions is your taxable income. Nearly all individuals that complete their taxes can take a standard deduction, and some can itemize their deductions depending on filing status and dependents. This includes expenses for health care, personal property taxes, state and local taxes, gifts to charity, and more. Keeping track of these through the year will be a significant asset to your tax planning strategy. When completing your taxes, comparing your itemized deductions with your standard deduction will allow you to make an informed decision and choose the larger of the two.
Taking Advantage of Tax Credits
When completing your taxes, be aware of any tax credits you can take advantage of. Education expenses, retirement savings, and adopting children are among the tax credits you could be eligible for. Tax credits reduce your taxes, but also keep in mind anything that might increase your taxes. For example, an early withdraw from a 401(k) will become part of your taxable income, and will often include additional taxation for the early withdrawal.
One of the most common tax credits is the Earned Income Credit (EIC). The EIC is credited to your account as payment, unlike other taxes credits. This means that there is more often than not a tax refund, even if the total tax is reduced to zero. If your income is below a certain amount, you may be eligible for this credit.