Retirement Plans

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Reducing Your Taxes

It is that time of year again, TAX TIME. And, at tax time, it’s smart to arrange your financial affairs so as to minimize your taxes.

There are several ways to reduce your taxes, and each with several variations.

1. Reduce Your Income

Adjusted Gross Income (AGI) is a key element in determining your taxes. AGI is determined by your income (including wages, interest, capital gains, income from retirement accounts, alimony paid to you) adjusted downward by specific deductions (including contributions to deductible retirement accounts, alimony paid by you); but not including standard and itemized deductions.

The best way to reduce taxes is to reduce your income. And the best way to reduce your income is to contribute to a retirement plan. Your contribution reduces your wages, and lowers your tax bill.

While retirement accounts provide the opportunity to save money for the future in a tax-free or tax-deferred environment, a self-directed IRA allows the you to benefit in a variety of alternative investment opportunities with the potential to earn even more.

With a self-directed individual retirement account you get the benefit of reducing your income AND selecting your own investments for your retirement funds.

Retirement plans for individuals come in all shapes and sizes. The most popular include Traditional Individual Retirement Accounts (IRAs) and Roth IRAs. For small businesses, 401(k)s, SEP IRAs and SIMPLE IRAs are common. In addition, there are savings plans for special needs, such as Coverdell Education Savings Accounts and Health Savings Accounts.

To reduce your taxes, pay yourself and save for retirement, either through an Entrust 401(k) or Traditional IRA. Contributions to these retirement plans will lower your taxable income, and lower your taxes.

2. Increase Your Tax Deductions

Itemized deductions include expenses for health care, state and local taxes, personal property taxes (such as car registration fees), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses.

Your standard deduction and personal exemptions depends on your filing status and how many dependents you have. You can increase your standard deduction and personal exemptions by getting married or having more dependents.

Itemize your deductions throughout the year. Keep in mind that the three biggest deductions are mortgage interest, state taxes, and gifts to charity.

3. Take Advantage of Tax Credits

Tax credits also reduce you will pay. There are tax credits for college expenses, for retirement saving, and for adopting children.

One of the best, and most abused, tax credit is the Earned Income Credit (EIC). Unlike other tax credits, the EIC is credited to your account as a payment. And that means the EIC often results in a tax refund even if the total tax has been reduced to zero. You may be eligible to claim the earned income credit if you earn less than a certain amount.

4. Increase Your Withholding

Finally, you can avoid owing at the end of the year by increasing your withholding. More money will be taken out of your paycheck throughout the year, but you will get a larger refund when you file.