Tax planning is a procedure taken by the majority of taxpayers to help arrange your financial affairs to ultimately minimize your tax payments. There are three basic procedures to reduce your taxes. Although the procedures are somewhat simple there are multiple variations of each process. Tax planning can be accomplished through reducing your income, taking advantage of tax credits, or through the increase of your deductions.
A fundamental step for income tax preparation is to reduce one’s income. The adjusted gross income is a variable that determines your taxes. The AGI is your income from any source minus adjustments to the income. The higher the AGI the more taxes you will pay, and conversely the less money you make the lower the taxes. The main way to reduce your taxes therefore, is to decrease your taxable income.
The primary way to reduce your income is to increase your taxable deductions. This form of income tax preparation enables an individual to counteract their income through various procedures or assets that allow the taxpayer to decrease their income. For instance, charitable contributions or capital losses can be used in tax planning to decrease one’s taxable income. The assets or functions are used to offset a portion of the individual’s income.
Similar to deductions, a taxpayer can also take advantage of tax credits. Tax credits are typically offered by a government agency to encourage investment or spark consumption. Regardless of the tax planning vehicle, all forms of income tax preparation are used to streamline the collection process and maximize an individuals refund.