It is US federal law that income tax has to be paid to the IRS. Knowing the basics, and understanding your own personal situation will help in reducing the risk of overpaying on your taxes. There are ways to reduce what you have to pay, making use of the current rules regarding taxes.

Reducing your taxable income is a easy way to reduce taxes. If you are employed by a company, you can maximize your 401K contributions or other registered retirement saving plans. If money is needed, you can borrow off of the 401K. Child care expenses should be tracked, as well as learning programs for children, which include sports, school and other expenses. Medical expenses should also be tracked, as if the income meets a threshold, it can be deducted. Self employed individuals should keep track of all business receipts. Your spouse and children should be paid if they help in the business. If you are in a rental home, then you can pay yourself as well for a managing service. Car receipts and mileage should be kept as well, along with business lunch and entertainment receipts. Home expenses should also be tracked if the business requires work done at home. Customer gifts, office supplies, all of it should be tracked.

Another way to reduce what you owe is to reduce you effective tax rate. Moving dividend income over to interest income is a way to reduce taxes, as dividend tax is not paid until it is removed from the portfolio. An educational trust or a registered retirement plan for your spouse will also reduce the rate on the taxes you may owe. You can also defer taxable incomes. Financial instruments such as unrealized capital gains are not taxable until assets are liquidated. You should also contribute to 401k or retirement until you retire or have no income.

Over all, there are three ways to reduce your tax liability. Reduce your taxable income, increase your deductions and increase your credits. Taking college courses or adopting a child will give credits to be taken from your taxes. Deductions can come from many sorts of financial instruments such as interest on loans and investments. Charity gifts will also contribute to deductions, along with state taxes. The best way is to track all of your expenses, and find those items which can contribute to deductions and credits.

Sometimes the best thing to do is to hire a financial advisor, some one who can help in the process of finding deductions and credits, as well as reducing your tax liability. Financial advisors are not only trained in finances, but they are also keeping up to date with all of the laws and rules regarding what has to be done. All in all, consider your options and be proactive in the process. Track your money down to every cent, and not just what is coming in or out of your wallet. Interest and contributions should be followed. Sometimes what should be done is hiring an expert.

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Originally posted 2009-01-29 05:21:51. Republished by Blog Post Promoter

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Personal Finance, taxes

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401k contributions, adopting a child, business lunch, business receipts, child care expenses, customer gifts, dividend income, dividend tax, educational trust, effective tax rate, financial instruments, home expenses, interest income, managing service, personal situation, retirement plan, service car, sports school, taxable incomes, unrealized capital gains