How To Lower Your Income Taxes – Ways To Minimize Your Taxable Income

Are you paying too much in income taxes? Are you getting all of the tax credits and deductions you are entitled to? Here you can find helpful tips to you minimize your taxes and keep more in your wallet:

1.  Get involved in company retirement plans.  Each dollar you contribute will reduce your taxable income and so your income taxes.  Also, enroll in your company’s flexible spending account.  You'll be able to set aside money for medical expenses and day care expenses.  This money is “use it or lose it” so be sure to estimate well! 

2.  Make sure you pay in enough taxes to avoid tax penalties.  Uncle Sam will charge you interest and penalties when you don’t pay in at least 90% of your current year's taxes or 100% of last year’s tax liability.   

3.  Buy a house.  The mortgage interest and real estate taxes are deductible, and may even help you itemize other deductions like property taxes and charitable donations.   

4.  Keep your house for at least two years.  One of the best tax breaks currently available is the home sale exclusion, which will allow you to exclude up to $250,000 ($500,000 for joint filers) of profit on the sale of your home from your income.  However, you are required to have owned and lived in your home for a minimum of 2 years in order to qualify for the exclusion. 

5.  Time your investment sales.  If your income is higher than anticipated, sell some of your losers so that you can reduce taxable income.  If you are planning on selling a mutual fund, sell prior to the year-end distributions so you can avoid taxes on the upcoming dividend or capital gain.   Additionally, you may want to allocate tax efficient investments to your taxable accounts and non-efficient investments to your retirement accounts, to reduce the tax you pay on interest, dividends and capital gains. 

6.  If you are retired, plan your retirement plan distributions very carefully.  In the event that a retirement plan distribution will push you into a higher tax bracket, think about taking money out of taxable investments to keep you in the lower tax bracket.  Also, take notice of the 59-½ age limit.  Retirement plan withdrawals taken before this age may result in 10% early distribution penalties in addition to income taxes. 

7.  Bunch your expenses.  A number of expenses must exceed a minimum before you can deduct them.  Medical expenses must be higher than 7.5% of your adjusted gross income and miscellaneous expenses like tax preparation fees must exceed 2% of your AGI).  To be able to deduct these expenses, you may want to bunch these kinds of expenses into one single year to go above the minimum.  To make this happen, you could prepay medical and miscellaneous expenses on December 31, this way you can get above the minimum amount. 

The main thing is to be familiar with the tax deductions and credits that apply to you and also to plan for taxable events.  And don’t be afraid to ask for help.  The advantages of consulting an experienced tax professional far outweigh the cost of hiring that professional.