My goal as an investment advisor is to get people out of the day-to-day, money in-money out cycle, and start them thinking of themselves as investors.
The first step is to reduce your taxes so you’ll have more money to invest, or add to the investments you have. The sooner that happens, the sooner benefits like tax advantages can start to pay off for you.
I’m going to show you how to lower your taxes — with these three steps.
1. Reduce taxable income
The first way to lower your taxes is by reducing your income—not by earning less money, but by reducing the income that is taxed. This lower income is called your Adjusted Gross Income (AGI).
To calculate your AGI, use the IRS form 1040 (not 1040A or 1040EZ). These adjustments can change year to year, but generally you can use alimony, self-employed tax, contributions to traditional IRAs, tuition, moving expenses for a new job, and interest on student loans to reduce your taxable income.
Another way to reduce your taxable income is though programs offered by your employer. If your employer offers 401Ks or Flexible Spending Accounts (FSA) and you take advantage of them, then your taxable income will be lowered on your paycheck. Because these adjustments have already been made, you don’t have to re-calculate them on your tax return.
If your employer offers these programs, you should seriously consider using them.
2. Use credits
Another way to reduce taxes is to use credits. These are dollar-for-dollar reductions to the tax you owe.
The most important of these are refundable tax credits. These will not only reduce your tax bill, but can reduce all of your tax and give the excess credit as a refund. There are two refundable tax credits: the Earned Income Credit (EITC) and the Child Tax Credit .
Check to see if you qualify. An estimated 25% of people who qualify for the EITC do not even apply for it! And if you missed it in previous years, you can apply
for the last three years that you missed!
There are also non-refundable tax credits available (credits that can reduce your tax bill, but will not go past zero and give you a tax refund). There are credits available for college education. higher education. childcare. for the elderly or disabled. and for retirement savings. These generally apply to low or moderate earners. Click the links to see if you qualify.
3. Claim deductions
Deductions lower your taxable income. It isn’t a dollar-for-dollar benefit, but it reduces your tax by essentially showing that you have less income to tax.
Here are the expenses that can be used as deductions:
- Interest on mortgages
- Property taxes
- State and local taxes
- Charitable donations
- Medical and dental expenses (must be more than 10% of your adjusted gross income)
To learn more. watch the free video Itemized deductions from the lynda.com course Income Tax Fundamentals .
Also be aware of other miscellaneous deductions. If they amount to more than 2% of your adjusted gross income, you can claim them, too. There are lots of them. A few of the more popular deductions include:
- Job education
- Tools for work
- Fees you pay to get your taxes prepared
Confusing? Yes! Learn more with the lynda.com course Income Tax Fundamentals .
If you want further help, consider these online tax preparation services:
Many have free tools to help guide you through the process. Most services will file your return for you, and many of them are free.
If you have a lot of different sources of income, have self-employed income, or have numerous deductions, you should think about getting a professional to help. But get a quote up front before you begin.
Your goal should be to make sure the cost of the professional is less than the extra money you’ll get back!
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