Tax planning can position your assets to minimize the taxes you have to pay. Tax planning can help you:
- Reduce income
- Increase your tax deductions
- Take advantages of tax credits
- Increase your withholding
- Improve year-end strategies
Adjusted Gross Income (AGI) is crucial in determining your taxes. Your tax rate and tax credits depend on your AGI. It impacts your financial life in ways other than taxes. Your bank, mortgage lenders, or even college financial aid programs request your adjusted gross income. This determines your finances.
INCREASE YOUR TAX DEDUCTIONS
Taxable income is what remains after you have reduced your adjusted gross income with your deductions and exemptions. There is the standard deduction, and some may itemize expenses. Keeping track of your itemized expenses will help you determine whether to take the higher of your standard deduction or your itemized deduction.
TAKE ADVANTAGE OF TAX CREDITS
Tax credits reduce your tax. There are tax credits for college expenses, for retirement savings, and for adopting children. There are two education-related tax credits: the Hope Credit for students in their first two years of college, and the Lifetime Learning Credit for anyone taking college classes.
Avoiding early withdrawals from your IRA or 401(k) plans will avoid taxes. The amount withdrawn will become income and taxable, and it could be considered an early withdrawal if you do not reach the age requirements for taking withdrawals.
INCREASE YOUR WITHHOLDING
Avoid owing at the end of the year by increasing your withholding. Withholding more money from your paycheck throughout the year could provide a bigger refund when you file your taxes.