Common Sense Strategies To Lowering Your Income Tax Bill

Common Sense Strategies To Lowering Your Income Tax Bill

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Wouldnt you like your money to stay at home rather than going to Washington?
That can be done by proper income tax planning.
Income tax planning is an interesting activity because it is based on voluntary compliance, meaning that income tax is a tax that is not compulsory, but one in which citizens voluntarily comply with the Code. Lets not go down the rabbit hole of legalities and logic of this oxymoron, but instead look at common sense strategies to reduce our yearly income tax liabilities within the Form 1040, our US Individual Income Tax Return.
Go get a copy of Form 1040 for 2009.
The strategy is simple. Earn as much income as we can, but structured in a way that keeps line 37, adjusted gross income, as low as possible.
Income
The first section of interest is the Income section (lines 7-22). This section has a breakdown of just about every source of income one can have so that it gets reported. As a professional practice owner it should become clear that one would want to keep salaries and taxable interest to a minimum, as well as ordinary dividends. Net income from business activities demonstrates how important it is to be astute in legally deducting every expense possible so the net profit is minimized. This is where the greatest tax benefits are realized. The corporate/partnership return will list all of the deductible expenses and the net profit from this form will be transferred to the 1040.
IRA and pension distributions should be kept to a minimum (that means not spending the money, especially prior to age 59). Unemployment and Social Security benefits would also be kept to a minimum if you have other sources of income to handle expenses.
Take a look at each line to see how it could be lowered (without actually lowering your income).

Adjusted Gross Income
The second section from line 23-37, is Adjusted Gross Income, or adjustments to income that lower that number for the year. Some of these adjustments include health savings account contributions, IRA and qualified plan contributions, moving expenses, student loan interest deductions, tuition and fees, and self-employed health insurance deductions.
Take a look at each line to see which expenses for which you qualify (or could qualify next year).
These are the most effective ways to reduce taxes and are called above-the-line deductions, because they are taken before adjusted gross income is calculated. A deduction means that a dollar spent lowers your taxable income by a dollar.
Itemized Deductions
The next area that can provide some tax relief is Schedule A, Itemized Deductions.
If you have enough deductable expenses to itemize (more than $11,400 married filing jointly for 2009), then you can benefit from additional expenses. These include mortgage interest, some types of taxes, charitable gifts, casualty losses, and other miscellaneous deductions. These deductions do not provide the same assistance in lowering your taxes as the above-the-line deductions because of certain limitations and phase-outs embedded in the Schedule A.
Tax and Credits Section
On page 2 of the Form 1040, we have the Tax and Credits section. Here you calculate your taxable income and the tax owed. From lines 47-53 and 63-67, there are tax credits, which are credits against the tax due dollar-for-dollar. Included here are child tax credits, education credits, and retirement savings contributions credits, among others. You may or may not qualify, but it doesnt hurt to check.
As previously mentioned, the biggest income tax breaks come in at the business level. There are several Code sections that provide tax relief to small-business owners. Many of these advanced strategies are summarized on my website so that you can get an overview of some of the strategies available to you.
This is the basic strategy for reducing ones income tax liability on an annual basis.
Perusing the Form 1040 can give one a headache, but the effort may be worth it if any money can stay at home rather than going to Washington.

About the Author:
After 15-plus years of being a financial planner, Christopher Music decided there
had to be a better way. Witnessing financial debacles of big industry and
government-driven economies caused Christopher to take action, developing an
instrument that measures the success of any financial plan. The Financial
Security AnalysisTM (FSA) is the back bone of Musics firm, Wealth Advisory
Associates (WAA). Visit www.wealthadvisoryassociates.com



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