While paying income tax is something that we can’t get out of doing, no one wants to pay more than they have to. In fact, it is a wise person who takes a critical look at the amount of tax they pay and sees how to reduce it. This is not dishonest; there is no need to pay Uncle Sam any more than is legally required.
One way to reduce your income tax is to be taxed on less than you make. How can you do this legally? It’s simple; participate in that retirement fund your employer sponsors. If it is a 401(k) or a 403(b) scheme, you can put in a whopping $15,500. Your employer deducts this amount - or whatever you decide to put in - before your taxes are calculated, so you won’t be paying tax on it.
If you are over 50 years of age and have not used that retirement fund much - or even if you have - then you are in luck because it is possible to make a catch-up ‘donation’ of up to $5,000. Since this also reduces your pre-tax gross income, you will pay less tax.
Most people know that if they give to a charity, it is tax deductible, but this also applies to goods and services, so if you have stuff you don’t want, you can donate it to charity, get a receipt and claim it off your tax. The same goes for services; just be sure you get a receipt. Every little bit mounts up.
Your employer may also sponsor a flexible spending plan for child-care and certain medical expenses. It will pay you to participate in this, as once again, your employer will deduct this amount from your pay before calculating your income tax.
Making solar improvements to your home will gain you certain income tax benefits that may be up to the value of $2,000. Make sure this tax benefit is applicable to your improvement before you go ahead.
Whether you prepare you own tax returns or have an accountant do it, you may save a considerable amount by itemizing. You can accept the flat amount offered - which was $3,300 for 2006, or you can itemize. This is certainly worthwhile looking into, particularly if you have a mortgage, because the interest you pay is an allowable deduction for most people. This is mostly enough to put you over the limit and make itemizing worthwhile. Real estate taxes (but not added charges like garbage pick-up), and state and local taxes are also deductible.
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