It is possible that you would be paying a lot less in IRS taxes than you have in the past if you just practice planning for your taxes a little better. Every year, people in similar tax conditions pay different tax amounts because some tax payers capitalize more on tax provisions to pay the least taxes possible. You can also get smart with your IRS taxes and plan for a lower tax payment in the coming year! With some more accurate planning, you can save on lots of taxes into future years.

Tax Process

For you to operate at an optimal tax position, you will need to analyze all factors that affect your income and tax liability. The process of taxation is done as follows – The Adjustable Gross income (AGI) is arrived at by removing the eligible adjustments from the schedule of all your incomes. The standard or itemized deductions are then reduced from the AGI. A further exemption is made for every eligible dependent to apply to the taxable income. Your tax rate is then applied to this taxable income to get to your tax obligation. Therefore, simply put, to reduce on your tax burden, you need to reduce your taxable income to the least possible amount by capitalizing on all possible adjustments and deductions.

Lower Your Income for Tax Purposes

There are various things that you can do to reduce the applying income for tax purposes. You can take up a 401(k) plan which lowers your income and pushes the amount into a tax deferred retirement account. You can also defer various incomes, including year-end bonuses, sales of property with a capital gain, or defer receipt of retirement account distributions (if you will get to 70 and ½ years by end of year). You can also reduce your income by breaking down a property sale into installments as opposed to getting a lump sum payment.

For businesses, there are various ways that you can lower the income to be considered for tax purposes. You can contribute to qualifying charities or make all your expenses within this year (such as purchasing office equipment or stocking office supplies). You can also seek to defer any income receipts (for example, by deferring invoices of some of the payments due in the late fourth quarter).

Take All Available Deductions

There are various ways of increasing your deductions to reduce your AGI. Retirement plans are a good way of optimizing on deductions as contributions to such plans are eligible for deductions. You can also increase your deductions by taking on life and health insurance, having a health savings account (especially for self employed individuals), going to college to further your education, or paying off your student loans. You can also reduce your current year’s tax by prepaying applicable expenses such as loan interests and medical expenses.

Capitalize on Credits

Credits work to reduce the tax owed. Therefore, maximizing on all available credits will impact directly on the taxes to be paid to Uncle Sam. Some of the credits that you can qualify for include investing in qualifying retirement savings plans, enrolling in college, dependent child-care credit that requires hiring a child caretaker while parents or parent (if single parent) is working or in school, and adopting a child. Other less-utilized credits include purchasing energy-saving equipment for your home and also buying a hybrid car.