Did you owe the IRS money when you filed your 2010 tax return? Or, did you not get as much of a refund as you had hoped for? If you are looking to make changes so that when you file your tax return next year you will either owe the IRS less or get a bigger refund, then now is the time to start planning. Advanced planning for your 2011 tax return is essential if you want to minimize what you will owe and maximize what you will get back in your return.
Your Adjusted Gross Income and What It Means
The amount of taxes you will pay is ultimately based on what is referred to as your adjusted gross income, or your AGI. Your AGI is configured by adding up all of your income, from all sources, and then subtracting out all of your credits and deductions. The final figure is your AGI. The lower your AGI, the less you will owe to Uncle Sam and the better chance you will have at receiving a refund.
How To Reduce Your Adjusted Gross Income
Tax planning is all about finding legitimate ways to help lower your adjusted gross income. There are two basic ways to do this: tax deductions and tax credits.
Using Tax Deductions and Tax Credits To Reduce Your Tax Bill
The best way for you to reduce your tax bill is to look for deductions and credits that may be entitled to. Some of the most common deductions and credits that you will not to miss include the following:
- Interest paid on your home mortgage over the course of the year.
- Charitable deductions – both cash and other gifts. The more you donate, the more you lower your AGI; just be sure to always obtain a valid receipt for each donation.
- Job-related expenses if you own your own business.
- Personal property taxes paid out during the year.
- Some college or job search expenses.
- Adoption expenses.
- Money you contribute to certain retirement accounts, including Employer 401(k)s, traditional IRAs and more.
What Else Can I Do?
One thing you will certainly want to do is avoid paying any additional taxes. Some people who find that they need money will cash in or make withdrawals from one or more of their retirement accounts. You will want to avoid this if at all possible, as any funds you pull from these accounts are considered taxable income and will be added to your AGI, which ultimately means a higher tax bill.
Finally, if you owed a hefty tax bill on your 2010 return and do not think you can lower your AGI enough during 2011 to avoid another such bill, you may want to consider increasing your tax withholding during 2011. Or, if you are self-employed, you may want to increase your quarterly estimate tax payments.
While the above list is a great start to reducing your taxable income, there are numerous other deductions and credits available to taxpayers each year. It is always a good idea to review current year deductions and credits as well as to consult with your tax preparer to see what other ways you may be able to save for the 2011 tax year.