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Ten Ways to Lower Your Income Tax Bill
Lowering Taxes

Death and taxes are two subjects that many people don't like talking about, but while you can't really control the former, with some careful planning you can control the latter. It may seem like your taxes are difficult to understand (have you read an IRS publication lately?), but it's worthwhile to educate yourself about income taxes and how you can really make sure you are taking advantage of every legal deduction.

Here are ten ways to lower your income tax bill:

  1. Begin your tax planning strategy early in the year. In fact, right after the holidays is an excellent time to brainstorm your income tax strategy for the New Year.

  2. Keep excellent tax records. And we're not talking about stuffing a bunch of receipts in a shoebox while you think, "I'll deal with that later." Buy a good notebook and record any tax related expenses every month; and don't forget to file the appropriate receipts along with it.

  3. Don't forget to take advantage of the child care credit. If you and your spouse both work and someone else cares for your children, you're entitled to a child care credit.

  4. Contribute to a Keogh plan or an IRA early in the year. Most tax payers wait until April 15 to claim these deductions for the prior year. While that may seem like a good idea, remember that you have lost nearly 15 and one half months worth of compound interest.

  5. Have your income tax returns prepared by a professional accountant. Studies show that people who have their returns prepared by a professional pay less in taxes.

  6. Think about taking a home equity loan if you are considering a major purchase, such as a car. Interest on home equity loans are usually tax deductible, while interest on other loans aren't.

  7. Make sure you don't pay income taxes on income that isn't taxable. Did you know that you don't have to report gifts, inheritances, life insurance payments, and child support payments?

  8. Check to make sure you are claming the correct number of withholdings on your W-4. If you received a large income tax refund last year, consider claiming more exemptions, which will effectively spread your tax refund out over the course of the year back where it belongs: in your pocket.

  9. If you are self-employed, consider paying your children a salary. It's tax deductible, and they can earn nearly $5,000 without having to pay any federal income tax. Just make sure you are paying your children a reasonable amount of money for a reasonable amount of work.

  10. Double-check all itemized deductions. By keeping careful tax records throughout the year, you are helping to make sure you don't miss a legal deduction.


See also: Home Equity Loan, Mutual Funds, and Home Budgeting



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