How to Reduce Your Tax Burden
Peter VanderWoude, CPA, CGMA
April 1, 2016
It’s early April and most people have already filed their tax returns for 2015. If you were dismayed by a tax due, perhaps you asked your tax preparer, “How can I reduce my taxes?”
The answer to that question can fill books and your tax advisor generally does not have enough time during tax season to give you a thorough answer for your specific situation. Let’s go over a brief conceptual overview.
This may sound simple, but there are three directions to pursue: reducing your adjusted gross income, increasing your deductions and maximizing tax credits to arrive at a lower taxable income and/or tax due.
If you have cash or earnings to spare you can make use of tax deferred retirement plans – 401(k), non-profit 403(b), Simple IRA, traditional IRA, etc. Contributions to these plans will reduce your taxable income and yield less tax due in the current year. You should also make use of employer plans that help you cover health care and dependent care costs on a pre-tax basis for the same reason.
If you are exploring other measures, then you need to consider what expenses you are already paying for that can be potentially deducted against your income. If you have a home-based business you can apportion some of the costs of your home and your vehicle against your business’s income. If you are providing more than half the support for someone perhaps you can claim them as a dependent.
If you have reduced your taxable income then another way to reduce your tax due is to maximize the tax credits for which you are eligible. Many people are eligible for the Earned Income credit, child tax credit and education tax credits. For those contemplating renewable energy such as solar, the government is making the tax credit numbers look good for your investment.
The complexity in tax planning has to do with establishing or making use of tax structures for personal, business and investment interests that determine when income and deductions are recognized. The objective is to generally accelerate deductions and delay the recognition of income.
Tax planning does not have to be complex. Many times all it takes is an extended conversation with your tax advisor about your situation. Your advisor may then be able to point out ways for you to reduce your taxes that you may not be utilizing right now. The best time to have this conversation is after tax season is over and your tax advisor has taken some well-deserved time away from the office to rest and refresh. Set up your appointment now before distractions cause you to forget! Best of success!