TaxPlanningBasics3WaystoReduceYourTaxesThegoaloftaxplanningistoarrangeyourfinancialaffairssoastominimizeyourtaxes.Therearethreebasicwaystoreduceyourtaxes,andeachbasicmethodmighthaveseveralvariations.Youcanreduceyourincome,increaseyourdeductions,andtakeadvantageoftaxcredits.ReducingIncomeAdjustedGrossIncome(AGI)isakeyelementindeterminingyourtaxes.LotsofotherthingsdependonyourAGI(ormodificationstoyourAGI)--suchasyourtaxrateandvarioustaxcredits.AGIevenimpactsyourfinanciallifeoutsideoftaxes:banks,mortgagelenders,andcollegefinancialaidprogramsallroutinelyaskforyouradjustedgrossincome.Thisisakeymeasureofyourfinances.Becauseyouradjustedgrossincomeissoimportant,youmaywanttobeginyourtaxplanninghere.Whatgoesintoyouradjustedgrossincome?AGIisyourincomefromallsourcesminusanyadjustmentstoyourincome.Thehigheryourtotalincome,thehigheryouradjustedgrossincome.Asyoucanguess,themoremoneyyoumake,themoretaxesyouwillpay.Conversely,thelessmoneyyoumake,thelesstaxesyouwillpay.Thenumberonewaytoreducetaxesistoreduceyourincome.Andthebestwaytoreduceyourincomeistocontributemoneytoa401(k)orsimilarretirementplanatwork.Yourcontributionreducesyourwages,andlowersyourtaxbill.YoucanalsoreduceyourAdjustedGrossIncomethroughvariousadjustmentstoincome.Adjustmentsaredeductions,butyoudon'thavetoitemizethemontheScheduleA.Instead,youtakethemonpage1ofyour1040andtheyreduceyourAdjustedGrossIncome.AdjustmentsincludecontributionstoatraditionalIRA,studentloaninterestpaid,alimonypaid,andclassroomrelatedexpenses.AfulllistofadjustmentsarefoundonForm1040,page1,lines23through34.ThebestwaytoboostyouradjustmentsistocontributetoatraditionalIRA.Asyoucansee,twoofthebestwaystoreduceyourtaxesistosaveforretirement,eitherthrougha401(k)atworkorthroughatraditionalIRAplan.Contributionstotheseretirementplanswillloweryourtaxableincome,andloweryourtaxes.IncreaseYourTaxDeductionsTaxableincomeisanotherkeyelementinyouroveralltaxsituation.Taxableincomeiswhat'sleftoverafteryouhavereducedyourAGIbyyourdeductionsandexemptions.Almosteveryonecantakeastandarddeduction,andsomepeopleareabletoitemizetheirdeductions.Itemizeddeductionsincludeexpensesforhealthcare,stateandlocaltaxes,personalpropertytaxes(suchascarregistrationfees),mortgageinterest,giftstocharity,job-relatedexpenses,taxpreparationfees,andinvestment-relatedexpenses.Onekeytaxplanningstrategyistokeeptrackofyouritemizedexpensesthroughouttheyearusingaspreadsheetorpersonalfinanceprogram.Youcanthenquicklycompareyouritemizedexpenseswithyourstandarddeduction.Youshouldalwaystakethehigherofyourstandarddeductionoryouritemizeddeduction.Yourstandarddeductionandpersonalexemptionsdependsonyourfilingstatusandhowmanydependentsyouhave.Youcanincreaseyourstandarddeductionandpersonalexemptionsbygettingmarriedorhavingmoredependents.Thebeststrategiesforreducingyourtaxableincomeistoitemizeyourdeductions,andthethreebiggestdeductionsaremortgageinterest,statetaxes,andgiftstocharity.TakeAdvantageofTaxCreditsOncewe'vetweakedourtaxableincome,wearereadytofocusourattentiononvarioustaxcredits.Taxcreditsreduceyourtax.Therearetaxcreditsforcollegeexpenses,forsavingforretirement,andforadoptingchildren.Thebesttaxcreditsareforadoptionandcollegeexpenses.Noteveryoneisinapositiontoadoptachild,buteveryonecouldtakesomecollegeclasses.Therearetwoeducation-relatedtaxcredits.TheHopeCreditisforstudentsintheirfirsttwoyearsofcollege.TheLifeti...
