There are many things in life we try to plan for. We try to plan home and car purchases, the future of our children, and our retirement. Not many people plan their income taxes because they do not know anything about it. What is income tax planning? Why is it important?
The most important part of tax planning is to minimize your taxes. Income tax planning involves determining which tax laws apply to you. Every person has a different income situation that will fall under certain laws. To make sure you are reducing your tax liability, you need to create a tax plan, which can be done in three different ways.
The first way of creating income tax plans is through your adjusted gross income. The AGI is the result of subtracting and adding certain aspects to your income. Things like investments are added to your wages, while things like mortgage payments subtract from your wages. Higher AGI totals mean a greater tax liability. If you want to reduce your tax liability through your adjusted gross income, start a retirement plan like a 410k. When you add money to this plan, your income is reduced, which in turn lowers your tax liability.
A second way to reduce your taxes through a tax plan is through deductions. Most people assume that tax deductions are only for business owners. Itemizing your deductions is helpful. Many people can deduct things like health care expenses, car registration fees, the interest on your mortgage, and charitable gifts.
Tax credits are a third aid in your income tax planning. There are many different kinds of tax credits, and you won’t be eligible for all of them. Even a few, however, can help reduce the tax amount you would owe. There are college tax credits, credits for certain home renovations, and for adopting children. Most common is the earned income credit. Utilizing the credits that are available to you can help reduce how much taxes you will owe.
You can also reduce the amount of taxes you would owe by raising the withholding amount from your wages. Many people with dependents think it is better to claim zero dependents on W-2 forms because they get more of their paychecks. Actually, by increasing the amount that is taken out of your pay, you get a bigger refund on your income tax.
It is important to always keep receipts. You never know what can be claimed as a deduction. Purchases for home improvements, gas expenses, and anything related to your job could qualify. If your itemized deductions are greater than the standard deduction, you can choose them but you can use both types of deductions.
When people hear the question what is income tax planning, they often think it is just about filing your taxes properly, but it is more than that. It is about what you do before it is income tax time, throughout the remainder of the year. It is about making sure that you have everything set up so that you are making sure that you are doing everything that you can to lower how much taxes you will be responsible for.