The prime focus of tax planning is to arrange one’s financial activities for the year in such a way so that the lowest possible amount for tax payment is incurred. Undoubtedly, the most difficult time for small and medium enterprise owners is the tax season in which they have to pay a taxable amount on all the income they’ve earned during the previous financial year.
Most business owners end up paying more than they should because they are not well aware of the legal tricks they can use to minimize their tax burden. But now, you can save up on taxes by following the three awesome tax burden reduction strategies mentioned in this blog.
Reduce Your Income
One of the key determining factors in figuring out the taxable amount is adjusted gross income also called AGI in short. Your tax rate and different tax credits also rely on AGI. Since the AGI play a vital role in the entire journey of determining and making tax payments accordingly, it is best to pick the adjusted gross income as the starting point of your tax planning process. If you are not sure what AGI exactly is, it is actually the entire income collected from all resources minus the adjustments made to the aggregate income.
Ideally, if your total income is high, your AGI will also follow the higher trend and if you make less income, your AGI for the year will decrease automatically. Therefore, the most effective method to minimize the tax load is to slash down your income. But how exactly can you reduce your income? The answer is pretty simple. Just set aside a large chunk of your income for your retirement plan by following the conventional IRA plan or 401k at work plan.
Boosting Your Tax Deductions
You can also smooth out your tax situation over all by focusing on your taxable income. Now the taxable income actually is the left over amount that is calculated once all the deductions and exemptions are cut off from AGI. Itemized deductions is what you should aim for in various categories such as interest on mortgage, charity, health care, tax planning and preparation expenses, local as well as state taxes and expenses linked to investments.
The best way to do this is to record all your itemized expenses incurred throughout the year in an excel spreadsheet and review it from time to time. By recording all these expenditures, you can easily compare your standard deduction with the itemized expenses incurred within the one year time frame. Remember to always consider the higher of your standard deduction or itemized deduction. When itemizing your expenses, make sure you pay more attention to three main categories; donations to charity, state taxes and interest on mortgage.
Using Tax Credits To Your Advantage
Once you have adjusted your taxable income to reduce your tax burden, the next step is to take full advantage of the tax credits. Some tax credits that can help in minimizing the taxable amount considerably are going to college, adopting a child or setting aside money for retirement.
SK Financial CPA is where you should get help from when filing for taxes by letting professional CPAs and CFAs give you advice on how to present your accounting statements for the year.