It’s the age-old question, “How do I lower my tax bill?” We all want to find ways to make that number as small as possible, or better yet, get a refund. The main ways to lower your tax bill are to lower your adjusted gross income (AGI) with deductions or lower the amount of your tax bill with tax credits.
It All Starts with Your Gross Income
Before you can lower your tax bill, you need to figure out how much money you made this year, starting with wages earned, business income, capital gains, etc. If you have any income that is not taxable, you’ll want to remove those from that total. Non-taxable income includes financial gifts and inheritances up to a certain amount, life insurance payouts, alimony on the federal level, disability payments (e.g., SSI), some social security benefits, and more. There are also some deductions you can take prior to calculating your AGI, such as student loan interest, health savings account distributions, and some self-employment deductions.
Tax Deductions
Once you total all of the above, you will have your adjusted gross income, and from here you can lower your tax bill even more with tax deductions. You have to choose between itemizing your deductions or taking the standard deduction, which is based on your tax filing status. In recent years, the Tax Cuts and Jobs Act has reduced the number of eligible itemized deductions and has increased the standard deduction. You’ll only want to choose itemized deductions if it will give you a larger deduction than the standard one.
Taxable Income
You now know your taxable income and can calculate your tax liability. However, you may be able to lower this number even more. It’s at this point that you can subtract tax credits from your tax liability to lower the amount you owe or get a refund.
Lower that Tax Bill with Tax Credits
Many of these tax credits are for families and/or low-wage earners. They include the earned income tax credit, the child tax credit, the child and dependent care credit, as well as some higher education credits and other credits. To find out what you may be eligible for, talk to a certified tax preparer.
These are many of the standard ways to reduce your tax bill. If someone suggests schemes that go beyond the norm to lower your tax bill, you should probably get a second opinion. You don’t want to get audited and find out you owe more!
We’re here to help you understand all the tax deductions and credits that may be available to you. Contact a tax preparer today.