tax planning
Tax planning
puts you on the
road to tax relief
Paying taxes is one of the two certainties in life alluded to by Ben Franklin. The second one, of course, is death, and nowadays with estate taxes there are even taxes after death. We cannot avoid either of those certainties but we can prolong our lives with healthful living habits and lower our taxes with three sensible tax planning strategies:
Strategy 1: Begin with reducing your adjusted gross income (AGI)
Your AGI is the number one factor in determining the amount of taxes you pay. Where your income falls in the IRS tax schedule is a function of your AGI minus authorized deductions and tax credits. Your AGI is also the amount that state tax collectors, mortgage lenders and college financial aid reviewers pay close attention to.
You can work on lowering your AGI (and your resulting tax liability) through contributions to retirement plans and other adjustments ranging from educator expenses to alimony payments. The advantage of whittling away at your AGI is that the expenses are not itemized on your Schedule A. Rather, they go directly on the first page of your tax form and immediately lower your AGI.
Strategy 2: Deduct more from your taxable income
Taxable income is what the IRS looks at after you claim deductions and tax exemptions. You can go the standard deduction route, which for 2012 topped out at $11,900 for a married couple filing jointly and $5,950 for a single person.
If your itemized deductions can get you past the thresholds of the standard deduction, you can lower your tax bill. It’s a good idea to track health care, all your other local and state taxes and that can take you down a peg or two in the tax table.
For the average wage earner accruing yearly deductible expenses in excess of the standard deduction can be daunting. However, if you have had significant medical bills, pay hefty state and local taxes or have made a large contribution to charity, it may be worth your while to fill out the extra IRS forms.
Then there is the obvious strategy of qualifying for more standard deductions and personal exemptions by marrying and having lots of children. Of course, you’ll need all the extra financial help you can get when you move into that more costly part of your life.
Strategy 3: Look at tax credits after reducing your taxable income
A tax credit differs from a deduction in that a tax credit lowers your tax bill dollar for dollar; whereas, a tax deduction just shaves money off your taxable income. For example, if you earned a $1,000 tax deduction because of medical expenses, your tax bill would only be lowered by $250 if you were in the 25 percent tax bracket.
On the other hand, earn a $1,000 Hope tax credit for college tuition, and your tax bill is lowered by $1,000, regardless of your tax bracket. There are more tax credits currently authorized. See the IRS index page on Tax Topics - Tax Credits for more information.
Finally, these two won’t lower your tax liability, but will affect how much you pay or owe at the end of the year:
(1) Increase your withholding if you’re paying the difference at the end of the year; or
(2) Decrease your withholding if you would rather have the money upfront and not give Uncle Sam an interest-free loan.
Be careful with (2), though. If you withhold enough and end up with a large tax bill, you could also be subject to an additional penalty. In either case, you should get professional help and advice with your taxes. The cost of that help, by the way, is deductible and gives huge tax relief.
By now, you have likely come to the conclusion that coping the IRS tax code in a way to get some tax relief is something that should be left to the professionals. Contact us and we’ll find those tax deductions and credits that are out there for you.