Tax Planning Basics to Reduce Your Taxes

TCM financial services

Tax planning primarily focuses on arranging your financial affairs in order to curtail your taxes. TCM financial services recognized three basic ways to reduce your taxes. Each method incorporates several variations – You can reduce your income, increase your deductions, and take advantage of tax credits.

Reducing Income

Adjusted Gross Income (AGI) is the key to determine your taxes. Lots of other factors hang on your AGI (or modifications to your AGI) including your tax rate and various tax credits.

AGI also impacts your financial life outside of taxes. Banks, mortgage lenders, and college financial aid programs usually demand adjusted gross income. This is a key measure of your finances. Therefore, your adjusted gross income is so important, you may require beginning your tax planning here.

What is adjusted gross income? AGI is your income from all sources excluding any adjustments to your income. Adjusted Gross Income increases with the increase in income. Now you can evaluate, the more money you make, the higher taxes you will pay. On the other hand, the less money you make, the minimum taxes you will pay.

In order to reduce taxes, you need to reduce your income. The best way to reduce your income is to consult financial services like TCM Financial Services that helps you in contributing money towards a 401(k) at work or through a traditional IRA plan. Your contribution reduces your wages and lowers your tax bill. Another method of reducing your Adjusted Gross Income – through various adjustments to income.

Increase Tax Deductions

Taxable income is another key element of your overall tax planning. Taxable income is what`s left over after you made AGI – deductions and exemptions. Almost everyone takes a standard deduction, but a step forward helps to itemize these deductions.

Itemized deductions contain expenses – health care, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, and gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses.

TCM Financial Services highlighted the key strategy is to maintain a track of your itemized expenses throughout the year, using spreadsheets or personal finance programs. There you can compare your itemized expenses with your standard deduction. You should always take the higher of your standard deduction or your itemized deduction.

Tax Credits Advantage

Once you make adjustments to your taxable income, you now need to focus on various tax credits. Tax credits diminish your tax. Tax credits include – saving for retirement, college expenses, and adopting children. The latter two are considerably best tax credits.

Even educational expenses include two types of tax credits – Hope Credit and Lifetime Learning Credit. Hope include college students of the first two years. Lifetime Learning is for students taking college classes, but the classes shouldn`t relate to your career.

If you want to avoid additional taxes, avoid early withdrawals from an IRA or 401(k) retirement plan. The amount you withdraw will become part of your taxable income, and on top of that, there will be additional taxes to pay on the early withdrawal.

TCM Financial Services found Earned Income Credit is one of the best tax credit. Unlike other tax credits, the EIC is credited to your account as a payment. This indicates EIC often results in a tax refund even if the total tax has been reduced to zero. Another advantage of EIC is earned income credit if you earn less than a certain amount.

Increase Your Withholding

By increasing your withholding, you can avoid owing at the end of the year. More money will be deducted from your paycheck throughout the year.

Eventually, the higher refund amount will be available, when you file your taxes.