When it comes to tax planning, you only have to remember this formula: Gross Income – Deductible Expenses = Net Taxable Income. Put simply, the main goal of tax planning is minimizing your net taxable income. To do this, you must:
Lower your Gross Income
Maximize your contributions to your retirement plan. If you have a 401(k) from your employer or the IRA, or something equal, you can make contributions before the end of the year, as long as you’ve not reached your limit yet. You won’t get taxed for this and it will minimize the income tax this tax year.
You can also defer your income to the next tax year. For example, if you have stocks that have increased since you bought them, you may defer getting a capital gain and increasing your gross income. This is most useful if you can offset your capital gain with a loss in the succeeding tax years.
Maximize your Deductible Expenses
To do this, you can use tax credits and tax deductions.
- Tax Credits
- Child Tax Credit – offers a $1,000 credit for every eligible child under 17 years of age.
- Child and Development Care Credit – If you have a child below 13 years old and you pay for someone to take care of him so you can work, you can qualify for this credit.
- Lifetime Learning Credit and Hope Credit – offers as much as $2,500 credit for every eligible student that is enrolled in approved higher education institutions.
- Energy Saving Appliances – If you have energy saving devices installed in your home, you can qualify for as much as $2,000 credit.
- Tax Deductions
- IRA Accounts – Although these don’t deliver immediate tax breaks, if you remove money from accounts like this, it won’t be counted as taxable income.
- Medical Costs – You can deduct medical costs of more than 7.5%.
- Homeowners Deductions – Modifying the schedule of particular payments can aid in advancing deductions for your property and mortgage tax.
- Personal and Business Expenses – You can charge a portion of these on your credit card to possibly claim them this tax year but repay them the next tax year.
Take note, however, that these tax planning tips are only general guidelines. For better, personalized, and proper tax planning, it is still best to consult your accountant.