Individual Tax Planning

By Sarah Presnell

It’s close to the end of the year and it’s almost time to start thinking about preparing your tax return. But before preparing your return, it’s a good idea to plan or anticipate what will be owed in taxes. The goal of planning is to arrange your financial situation so as to minimize taxes and to manage cash flow so that you have adequate cash to cover the amount of taxes that you might owe. There are three ways that you can reduce your tax liability: reduce income, increase tax deductions or take advantage of tax credits.

Reduce Income

The main way to reduce your taxes is to reduce your taxable income. A good way to reduce taxable income is to contribute to a 401k plan or similar type of retirement plan through your employer. This will reduce your taxable wages, and therefore reduce your tax bill.

Another way of reducing income is to reduce your adjusted gross income (AGI) by increasing your adjustments. Adjustments are deductions, but you don’t have to itemize them on Schedule A. Instead, you take them on page 1 of your 1040 and they reduce your Adjusted Gross Income. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid, and classroom related expenses. A great way to increase your adjustments is to contribute to a traditional IRA. For more information on contributions to retirement accounts, click here.

Increase Tax Deductions

One way to increase tax deductions is by increasing itemized deductions. Almost everyone can take a standard deduction, but if you have enough certain expenses, you can itemize. Itemized deductions include things such as: medical expenses, sales tax, state income taxes, real estate taxes, mortgage interest, investment expenses and charitable contributions. Unfortunately, due to legislation passed in 2012, certain itemized contributions will be phased-out for high income taxpayers. This is also known as the Pease Limitation. To read more about the Pease limitation, click here.

Taxpayers should keep track of itemized deductions throughout the year using a spreadsheet such as Excel. You can then compare your itemized deductions to the standard deduction. You should take the higher of your standard deduction or your itemized deduction.

One of the best strategies to reduce your adjusted gross income is to itemize your deductions and the three biggest deductions are mortgage interest, taxes and charitable contributions.

Tax Credits

There are several tax credits that are available to taxpayers. Tax credits reduce your tax. Examples of popular tax credits are residential energy credits, credits for college expenses, for saving for retirement and for adopting children. One of the best credits available is the earned income credit. If you make below a certain amount each year, you are eligible for this credit. This credit often results in the taxpayer receiving a refund even if the total tax has been reduced to zero.

For more information on individual tax planning, please contact our tax department.