4 Ways to Reduce Your Taxes
People are naturally concerned about how much their taxes will be, and are constantly looking for ways to reduce them. It's an obligation we all have as citizens to help support the government, and if you're like most people you don't mind paying your fair share--but you also owe it to your family to hang onto as much of your hard-earned money as you possibly can. As a result you're open to ways to legally lower your tax bill. Following are a few methods for reducing your taxes.
Decrease Income
This may sound silly on the surface, but if you think about it decreasing income is a sure way to reduce the amount of money you have to pay in taxes. That doesn't mean you actually have to make less money, only that the amount of income you claim is less than it previously was, so your taxes go down. You can do this quickly and efficiently by buying new equipment for your business or investing in something. You may also want to reevaluate your previous tax returns and make sure you've included all the deductions you're entitled to. If you find any, make sure you take advantage of them on this year's return. You can also reduce your tax liability by increasing your contributions to tax deductible savings plans, such as a 401k or an IRA. These modifications will change your adjusted gross income, or AGI. Your adjusted gross income is important to lenders and for other entities that are interested in your financial situation, such as college financial aid programs. Your AGI is an important indicator of your overall financial state.
Increase Deductions
Nearly everyone is eligible for some deductions on their tax return. The key to lowering your tax bill is to take advantage of every legal deduction you can find. There is a long list of tax deductions that may be available to you. They include expenses for health care, automobile registration fees, interest on a mortgage, charitable donations, or a variety of expenses associated with things such as your job, investments, tax preparation, etc. The list is long and you would do well to consult a professional tax attorney or a CPA for advice. They may be able to help you figure out ways of saving on your tax bill without raising the suspicion of the IRS. One way a professional could recommend to you is to itemize your expenses and keep a running record of them throughout the year. At year's end compare your list to any standard deductions you're entitled to. Whichever is higher is the one to claim on your income tax return.
Make Use of Tax Credits
After you've done all you can with the previous two methods to find ways of reducing your taxes it's time to look into ways to make use any and every tax credit you're eligible for. Among the tax credits that you may qualify for are credits associated with paying for higher education for yourself or a child. You may also be able to claim a tax credit for contributing to a retirement account. One of the best ways to take advantage of tax credits is to enroll in a college course. Any courses you may want to take don't even have to have anything to do with how you presently make money--they simply have to be legitimate courses in a school of higher education. In order to take full advantage of any tax credits for contributions to a retirement account you need to leave that money alone. Never touch it unless it's an absolute emergency, because as soon as you do it is subject to taxation. Another possibility for a tax credit is to take advantage of an Earned Income Credit or EIC. Before you take any action regarding an EIC make sure you consult with a tax attorney or a CPA. There have been cases of abuse associated with EIC's, and the IRS is certainly aware of their potential for misuse.
Increase Withholding
By increasing the amount of money that is withheld from your paycheck each week you will end up with a much lower tax payment at the end of the year. In fact, you should end up getting a healthy tax refund. Although this won't actually lower your taxes overall, a refund check could come in handy for a number of things. You should be able to adjust to the minor difference in your weekly paycheck without difficulty. The reward of a larger refund will be worth it.
Guest post from Bailey Harris. Bailey writes for CreditScore.net, a free credit score guide.