Most individuals share the common goal of wanting to reduce the amount of taxes they are required to pay. While some people look to “offshore bank accounts” to shelter their money from taxes (which the IRS addressed recently), the average taxpayer can save money through strategic tax planning that legally reduces taxable income.
Here are a few tips on how you can reduce the amount of federal taxes that you will pay for 2011.
Capitalize on Federal Tax Credits
A tax credit reduces the taxes you owe dollar for dollar, where a tax deduction reduces your taxable income but not your taxes directly. Many taxpayers are eligible for tax credits but fail to claim them on their tax returns either because they fail to file a tax return or they are unaware of their eligibility. For example, many lower-income taxpayers are unaware of the Earned Income Tax Credit, which is why the IRS had an “EITC Awareness Day” this year.
Here are some other tax credits that you may be eligible to take.
- Earned Income Tax Credit
- Adoption Tax Credit
- American Opportunity Tax Credit
- Energy Efficiency Tax Credits
- Child Tax Credit
- Child & Dependent Care Credit
For an extensive list of credits applicable in 2011 see IRS.gov’s publication section.
Leverage Federal Tax Deductions
Tax deductions help reduce the amount of taxable income you have. Therefore, you can reduce your taxes by reducing your taxable income. Tax law provides taxpayers with a standard deduction based on their filing status (single, married, etc.) – or they can choose to itemize deductions like home mortgage interest, charitable contributions, property taxes, student loan interest, and more. For more information on itemized tax deductions see Topic 500 at the IRS.
Reduce Your Taxable Income / Defer Taxes
By maximizing your yearly retirement contribution limits for accounts such as a 401k, or Simple IRA, you will end up paying fewer taxes in 2011. However, comes retirement time, you will have to pay taxes on that income with uncertainty as to what that tax rate will be. If you planned on making an energy efficient change to your household (solar water heater) or make a large purchase equipment purchase in 2012 as a sole proprietor for your business, you can lower your tax liabilities for 2011 by taking action in 2011.
Increase Capital Gains or Investment Income
It is difficult to do during this tough economy with a volatile stock market but is possible with the right investment advice. Many dividend-paying stocks still exist both in the US and abroad. Income earned from stocks, bonds, real estate, and mutual fund investments, held for at least a year, are taxed at the capital gains rate, which are lower than ordinary income tax rates. For example, if you are in the 15% bracket on your income tax rate, you could be paying as little as 5% on capital gains.