When planning your tax strategy for the year, you'll be glad to know that you can significantly lessen (or even eliminate) your income tax liabilities if you know what deductions and credits are available to you. For example, retirement planning can have a net positive tax impact. Similarly, owning your own home has positive implications for you. And, although college is more expensive now than ever, you can send your children to college and garner substantial tax benefits at the same time.
Here are some things to consider:
Let's assume for the purpose of discussion that you're married, with three kids (two in college) and you're employed full time. Your annual income is $76 thousand. And let's assume that you are making these plans at the beginning of the tax year, so that you have an entire 12 months to implement it.
One significant tax break you can get is by putting money into a 401k Plan.
If both you and your spouse each put five thousand dollars into your 401k account, that would reduce your annual taxable income by ten thousand dollars. This means that your adjusted gross income is $66 thousand. That will yield a substantial tax savings. Another significant tax break comes to you when you buy a house -- and itemize all your deductions.
Let's say you paid mortgage interest to the tune of $16 thousand. In addition, you paid real estate taxes of five thousand dollars. You also made charitable donations totaling $3500 to your church, synagogue, mosque or some other eligible organization. For purposes of discussion, let's say you live in a state that charges you income tax and you paid three thousand dollars.
Your itemized deductions equal $27,500. Now, your adjusted gross income is down from $66 thousand to $38,500.
If you claim 5 personal exemptions, your taxable income is reduced another $15 thousand to $23,500. Your income tax bill is going to be approximately three thousand dollars.
Now, let's see if we can whittle that down some more. How about using some relevant tax credits? Since two of your kids are in college, let's assume that one costs you $15 thousand in tuition. There is a tax credit called the Lifetime Learning Tax Credit -- worth up to two thousand dollars in this case. Also, your other child may qualify for something called the Hope Tax Credit of $1,500. Consult your tax professional for the most current advice on these two tax credits. But assuming you qualify, that will reduce your bottom line tax liability by $3500. Since you owed three thousand dollars, your tax is now zero dollars.
Not bad!
Lastly, since we are planning this strategy at the beginning of the tax year, you should go ahead and adjust your withholding amounts.
Since you've effectively done the planning ahead to reduce your tax liability to zero, you can go ahead and adjust your withholding to zero as well. But don't stop there: open up a Roth IRA (both of you) and put the excess cash there before you even have a chance to spend it. And if you have anything left over, set aside some money for your third child who isn't due to enroll in college for a few years yet.
Conclusion
With some help from the Federal tax code, you can reduce your income tax to zero. It just takes some knowledge, planning and action.
For more info on Federal Help That Reduces Your Income Tax, visit Ara Rubyan's Your Tax Help Online
Ara Rubyan isn't an accountant, an attorney, or a financial guru. Instead, he is like you: a consumer who has tried to make an informed decision on the best way to manage his tax obligations.
Now, he's put all his research (so far) in one convenient location and he's sharing it with you, no strings attached. Visit his website. You'll find:
* Lots of articles on various tax help topics;
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As always, consult a qualified professional when looking for tax help. In the meantime, go on over to Your Tax Help Online and have a look.
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