Important Information and Preparation Tips for Filing Your Personal Taxes

From The Tax Club, a partner with The Company Corporation®

Reducing Income

The first step toward minimizing your tax liability is to understand the term Adjusted Gross Income (AGI). By understanding this term, you will have a better concept of how the IRS determines your tax liability and what you can do to legally reduce this amount.

Because your AGI is so important, you may want to begin your end-of-year tax planning here. What goes into your adjusted gross income? AGI is your income from all sources minus any adjustments to your income. The higher your total income, the higher your adjusted gross income will be. As you can guess, the more money you make, the more taxes you will pay. Conversely, the less money you make, the less taxes you will pay.

The government creates incentives for taxpayers to behave in certain ways that benefits the taxpayer. One such incentive is pre-tax contributions to retirement plans. The number one way to reduce taxes is to reduce your income. For example, one great way to reduce your income is to contribute money to a 401(k) or similar retirement plan at work. Your contribution reduces your wages and lowers your tax bill.

You can also reduce your AGI through various adjustments to income. Adjustments are deductions, but you don't have to itemize them on the Schedule A. Instead, you take them on page 1 of the Form 1040 to reduce your AGI. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid, and classroom-related expenses. A list of adjustments can be found on Form 1040, page 1, lines 23 through 34. A great way to boost your adjustments is to contribute to a traditional IRA.

As you can see, a great way to reduce your taxes is to save for retirement, either through a 401(k) at work or through a traditional IRA plan. Contributions to these retirement plans will lower your taxable income, and lower your taxes.

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. One key tax-planning strategy is to keep track of your itemized expenses throughout the year using a spreadsheet or personal finance program. You can then quickly compare your itemized expenses to your standard deduction. You should always take the higher of your standard deduction or your itemized deduction.

Your standard deduction and personal exemptions depend on your filing status and how many dependents you have.

A great strategy 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 you've tweaked your taxable income, you are ready to focus your attention on various tax credits. Tax credits reduce your tax. There are tax credits for college expenses, saving for retirement, and adopting children.

The most common tax credits are for adoption and college expenses. Not everyone is in a position to adopt a child, but everyone could take some 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 college classes. The classes do not have to be related to your career. Ever had an interest in art, history, or philosophy? The government actually gives you a tax incentive to chase that lifelong interest of yours!

You may also want to avoid additional taxes. If at all possible, avoid early withdrawals from an IRA or 401(k) retirement plan. The amount you withdraw will become part of your taxable income, and there will be additional taxes to pay on the early withdrawal.

One of the best but most abused tax credits is the Earned Income Credit (EIC). Unlike other tax credits, the EIC is credited to your account as a payment. And that means the EIC often results in a tax refund even if the total tax has been reduced to zero. You may be eligible to claim the earned income credit if you earn less than a certain amount.

Increase Your Withholding

You can avoid owing taxes at the end of the year by increasing your withholding and changing your W-4 to lower your exemptions. More money will be taken out of your paycheck throughout the year, but you will get a bigger refund when you file your taxes. This basic method might have several variations. You can reduce your income, increase your deductions, and take advantage of tax credits.

Thank you for taking the time to read these tips. By taking advantage of these strategies, you will not only put yourself in a better tax position, but you will most likely be pursuing avenues that will benefit you in the long term.

The Tax Club, a partner with The Company Corporation, provided content for the article above. Get more information from The Tax Club at http://www.thetaxclub.com.

The Company Corporation is a service company and does not provide legal or financial advice. Our services and the articles contained in the TCC Business Builder e-newsletter are not the substitute for advice from a licensed attorney or accountant. We suggest that you consult an attorney or accountant for professional legal or financial advice.

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