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Taxes – income taxes US Taxes and death: it is an old saying, but it is true – neither is avoidable. However, with a bit of work, you can at least survive paying your taxes! The IRS has hundreds of ways for you to reduce your US income taxes, although most fall under just a few headings. This article will outline the main steps you can take to reduce your income taxes in the USA. Make less money (really!) The income tax you pay is based on a percentage of your income – the money you made in a year, whether from a salaried job, investments, or freelance work. Therefore, and not surprisingly, if you reduce the amount of money you make in a year, you will pay less income tax. But doesn’t that mean you will just be in a worse off position at the end of the year? Not necessarily – the trick is to reduce, not your actual income, but your adjusted gross income. Your adjusted gross income is an important number when figuring out your taxes. To calculate your adjusted gross income, you take all the money you made from any source in a year, minus any adjustments. The higher your adjusted gross income, the more US income tax you will pay. The key, therefore, is to lower your adjusted gross income using any of a number of adjustments that the IRS has made available. How to lower your adjusted gross income The main way to lower your adjusted gross income is to invest in your retirement. That’s right – not only will you end up paying less income tax, but you will be securing your future financial stability. You can do this by having your employer directly deduct a portion of your earnings into a 401(k) plan or a traditional IRA plan. Both plans allow your earnings to grow on a tax-deferred basis. That means that instead of paying tax on the income you put into your 401(k) plan or traditional IRA plan in the year you make the contribution, you pay tax on the income when you withdraw it from your retirement plan. Because you will likely be making a lower income in your retirement, you will be in a lower tax bracket and be able to keep more of your money. While the IRS has limits on how much money you can put into tax-deferred retirement plans (currently, you can put up to $4000 a year into a traditional IRA plan), it can still be a significant way to lower your adjusted gross income. Keep track of tax deductions The IRS also provides a number of ways that you can reduce the amount of taxes you have to pay. This is done primarily by letting you deduct taxes you have already paid at the state or municipal level (such as state income tax, sales tax, or property taxes). Other expenses, such as donations to registered charities, payments for job-related goods, and mortgage interest, can also reduce the amount of income tax you have to pay. |
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