Figuring Out Income Tax

“There’s just one thing I can’t figure out.  My income tax!” – Nat King Cole

Many concur with Nat King Cole, as the year begins, and they find themselves gathering up documents and filing forms for the previous year’s taxes.  However, you don’t have to shake your head in confusion and frustration.

A simple understanding of how the tax system works for your business and your family, can go a long way for aiding in “figuring out” your income tax.

First, acknowledge the basic framework of taxes, as this is the heart of what you should know:

  • Figure out your total income by simply adding taxable income from all your sources of income.
  • Calculate your Adjusted Gross Income (AGI) by subtracting any adjustments from your income.
  • Determine your taxable income by subtracting standard/itemized deductions and any personal exemptions.
  • Refer to the table of tax brackets to determine your tax.
  • Finally, subtract any available credits. Now you have your tax bill (or refund)!

Now, to truly “figure out” how to cut your income tax, and maximize your savings, you should be implementing these kinds of tactics:

  1. Lower your taxable income without lowering your overall income. Utilize income from your business, as well as investment income, to earn more nontaxable income.  Essentially, using this strategy, you can pull income from your small business as tax-free or tax-deferred benefits.
  2. Move income to other family members. Lower your tax bill by shifting your income to another family member who’s in a lower tax bracket.  This can be done with IRAs, HSAs, and college tuition funds.
  3. Maximize your adjustments to income, credits, and deductions. Don’t overlook these, use them!  Many folks overlook credits and deductions instead of taking advantage of the savings.

In summary, by identifying what to include in your income, what to deduct from it, and where to invest to make it nontaxable income, you can reduce your yearly income taxes.

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