Reduce Taxes

The modern economy of a nation is a very complex and intricate system to understand for a common man. However, each and every one of understands one thing – the government needs money for the smooth running of the economy and that money it gets from our pockets in the form of taxes.
The taxes can be levied on an individual in many undreamt forms- personal tax, property tax, sales tax and God knows what more. We are bound to pay the indirect taxes but can certainly reduce the direct taxes. It is possible to manage and reduce your taxes and the easiest reduction to achieve is the reduction in personal tax.
In fact, tax planning can be really helpful in reducing the taxes. The whole process may consist of some steps and tricks which are described here. Firstly, to start off, mid-year is a very good time to start tax planning because it is the time when you can really estimate your taxable income. Just take into consideration the mid-year perks and any benefits that you may get which reduce your taxable income. The estimate may not be exact but try to be as close in your estimate as possible. This would give you an idea of how much tax you should be paying by the year end. This would not only make you aware of any tax-saving investments that you may need to make but will also put less burden as you can distribute tax payments over a period of time.
Secondly you should keep track of the maximum available deductions. These may include state or local income tax, mortgage interest, charitable donations and contributions and other miscellaneous deductions. These deductions are instrumental in reducing taxes and thus, you should be aware of all the deductions that you may avail including the standard deductions. You must also be ready for the situation where you move above an income bracket and thus get no or less deductions. Please note that these deductions are valid only in the year you satisfied their condition or paid them. These are not valid for future years.
Thirdly, remember the dependant exemptions and also note if there would be a change in the exemption due to the age and economic or marital status of the dependant. Also remember that the exemptions may have a maximum limit based on certain conditions like different exemptions in different states or different maximum exemptions for self employed or salaried personnel. Although exemptions may help to reduce tax, they are often not considered best for business groups filing a common tax return or big households with many working members.
The next step involves checking your income after all the deductions and exemptions with the Federal tax brackets. This would not only let you pay advance tax and save you from a heavy tax payment in April, this may also reduce the tax by reducing the refundable amount, if any. One may note that a heavy refund is often considered bad tax planning as it is just like giving an interest free loan to the government. Thus, a heavy refund is considered to increase your net tax instead of reducing the tax. This is because you pay the tax as well as the interest on the refund that you get.
The last but not the least comes the tax credits. The tax credits are considered as a payment already made towards the owed amount. Thus, a tax credit reduces the tax on a unit by unit basis in comparison to the tax deductions which reduce the taxable income. This means that a tax credit of $100 would reduce the tax by $100, whereas an equivalent deduction or exemption would reduce it by the rate of tax payable. It must be noted that the tax credits are always refunded.
Tax credits may be categorized as refundable or non-refundable. Thus they are categorized as non-wasted and wasted respectively. A tax credit is called non-wasted when it reduces the tax to a certain limit. Examples are the “earned income tax credit” and “child tax credit”. A tax credit is said to be wasted when it tries to reduce the tax below the absolute zero. This is because the refund can not exceed the maximum tax paid by the tax payer. An interesting point to note here is that any salary paid to an employee in desperate need of money i.e. any salary given to an employee that helps in improving his/her social status drastically is taken as a tax credit. These include people with household income less than $30 a week.
One should tax plan early and should try to take all the benefits provided in the constitution so as to reduce his tax. One should not pay even an extra penny than he should.