In case you are paying too much taxes, or you are entitled to your deductions and credits then you need to work on reducing your income tax. There are various ways of reducing your income tax. You need to put the following tips into practice to achieve this.
Participate in retirement plans of the company
Each dollar you contribute reduces the taxable income and your income tax as well. You should also enroll in the flexible spending account of your company. You may set aside some money for your daycare and medical expenses and use the money to ensure you do your estimates well.
Pay enough taxes
There are normally interests and penalties charged when you do not pay enough taxes at the right time. To avoid such penalties and charges, always ensure that you pay the correct amount of tax at the right time.
Buy a house
Real estate taxes and mortgage interest are usually deductible and can allow you itemize deductions like charitable donations and property taxes. Buying a house will, therefore, help you avoid these and thus reduce your income taxes.
Time the sales of your investment
In case your income is higher than you expect, then sell some of the losers you have to lower your taxable income. If you are selling your mutual fund, do so before year-end distributions as this will help you avoid taxes on your upcoming capital gain or dividend. You should also allocate investments that are tax efficient to your account and the non-efficient ones to the retirement account. This way you get to reduce the amount of tax you pay on dividends, interests and capital gains.
Bunch your expenses
Some expenses usually exceed the minimum before you deduct them. To deduct such expenses, you should bunch the expenses into one year to go above the minimum. You can achieve this by repaying miscellaneous and medical expenses before 31st December to go above this minimum amount.
Carefully plan retirement distribution
If your retirement distribution plan can push you into higher tax brackets then, taking money out of the taxable investments to help keep you in lower tax brackets is important. Ensure also that you pay attention the age limit. Withdrawals are taken before the age limit of fifty-nine years may lead to penalties in addition to your income tax.
It is important that you are aware of the deductions and credits which apply to you and then plan for your taxable events.