Top Ways To Reduce Income Tax

in Tax Information


As the April 15th deadline approaches, many people are looking for ways to reduce the income tax they may owe while increasing the amount of the refund they are eligible for. In general, there are a few ways an individual can reduce their income taxes. They can reduce their income, take advantage of all available tax credits they are qualified for, and increase their deductions.

*Reduce Your Income

We’ll start with reducing one’s income. An individual’s Adjusted Gross Income (AGI) is the basis for determining the amount of taxes owed to the government and in turn, determining the amount of money to be refunded. The best and most practical way of reducing one’s income is to make contributions to a retirement plan such as a Roth IRA or a 401(k)plan. Another good benefit of a 401(k) plan, besides the immediate reduction of a person’s AGI, is that alot of employers will match contributions to 401(k) plans thus making it a good investment in the future. Another way of lowering one’s AGI includes making allowable adjustments such as education related expenses, including interest paid on student loans and any associated classroom costs. Alimony paid is also an allowable adjustment. Tax form 1040 has a full list of allowable adjustments to make certain an individual is able to make any adjustments they are qualified for.

*Take Advantage Of Tax Credits

Taking advantage of any and all tax credits available to an individual is another smart way to reduce one’s AGI, thereby reducing the amount of taxes owed. There are many available tax credits. A few that just about anyone can qualify for are education related. The Lifetime Learning Credit can be claimed by anyone, regardless of age, who is enrolled in a qualified collegiate institution, regardless if the classes taken are related to the person’s career or not. This credit can also be claimed by an individual paying a family member’s tuition (spouse or child). The Hope Credit if for students in their first or second year of college. Also like the Hope Credit is the American Opportunity Tax Credit which is a modification of the Hope Credit making it available to students in their first four years of college rather than being limited to the first two years. The Earned Income Credit (EIC) is the most widely used tax credit. The EIC acts like a tax payment to your account and oftentimes, even if the amount of taxes owed has been reduced to zero, individuals will receive a refund. Individuals earning less than a certain amount may be eligible for the EIC.

*Increase Your Deductions

Increasing one’s deductions is a sure way to reduce taxes owed. Taking itemized deductions such as healthcare expenses, property taxes and state and local taxes and comparing them to your standard deduction, then taking whichever is higher will decrease an individual’s AGI and decrease the amount of taxes owed.

Finally, the very easiest way to decrease the amount of taxes owed is to simply increase your withholding. By increasing your withholding, you will see less money in your paycheck each week but come tax time you are very likely to see a sizable refund. Talk it over with your tax preparation specialist to find out the best course of action to reduce the amount of taxes you owe and increase the amount of money you get back in the form of a refund.

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