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Investing for The Wealthy

Reduce Taxes


Regardless of your view on taxes – whether you consider taxation to be theft, the inevitable, or most likely the cost of living in an economically-strong country – it’s very unlikely that you want to pay more than you potentially owe on your income taxes.
This article will discuss a number of ways to reduce taxes, offering solutions for deductions and explaining how the different tiers of taxation affect your total tax liability. Read on to learn more.

Determining Your Tax Bracket

Your tax bracket will primarily determine your write-offs as well as the specific percentages you will be required to pay.

There are a number of free tools such as tax bracket calculators that can help you determine which bracket you fall into, and thus determine your personal tax liability.

Income is taxed by tiers, and your respective tax liability is also known as your marginal tax rate. This is the highest tax rate your income will potentially be subject to.

For the 2018 tax year, individuals and married couples can fall into tax brackets ranging from 10%-37%. Their aggregate income will then be taxed in various tiers between these percentages.

It can get quite complicated, but as an example an individual could be subject to a marginal federal tax rate of 22% if he or she made between $38,701–$82,500 from all sources. Once this individual’s income crossed over to $82,501, he or she would be subject to a 24% tax rate for all income between $82,501–$157,500.

Before you can begin to find ways to reduce taxes, you first need an approximation of which tax bracket you will likely fall into. You can then seek out the most appropriate and cost-effective deductions and tax-reduction strategies.

Understanding Deductions

There are a number of credits and deductions that can be applied within each bracket, and some of these will be discussed in detail below.

You should understand that deductions and tax credits are not interchangeable terms. In short, deductions lower the percentage of your total taxable income, while credits provide a dollar-for-dollar reduction to the total amount you owe.

A tax credit for $1500 would provide identical tax savings to a person reporting $25,000 in income and a person reporting $100,000. Meanwhile, a deduction will correspond to the tax bracket that you fall into. A $1000 deduction will save you $250 in tax liability if you fall into a 25% tax bracket.

There are several other ways in which deductions differ from tax credits, some of which surpass the scope of this article. It would likely be in your best interest to familiarize yourself with the different credits and deductions that you or your family could potentially qualify for.

But the bottom line is that the more income you produce, the higher taxer liability you will likely incur. Adjusted Gross Income (AGI) is the main figure that will be used in determining your personal tax liability.

AGI is roughly calculated by totaling your income from all sources, then making the appropriate adjustments. Gross income can include income from sources such as royalties, dividends, capital income, alimony payments received, and interest collected.

If you generate income from a number of streams, it’s important to get an accurate depiction of your AGI before looking for ways to lower it. Consider your alternate income sources before looking for additional ways to reduce taxes.

Tactics for Reducing Your Taxable Income

Reducing AGI is the main way in which to reduce your tax liability, and thus the total tax amount you will owe to the state and federal governments.

While the individual strategies will largely vary based on which tax bracket you and your family fall into, there are several tactics that people commonly use to reduce their total tax liability.

You should be aware that itemization is not typically necessarily, with over 70% of American taxpayers opting for the standard deduction. It will likely be in your best interest to keep receipts and invoices, but strict audits tend to be rare unless the submitted numbers are egregious.

If you have elaborate books or diverse revenue streams, then itemization may be in order. But this again will depend largely on your tax bracket and your AGI.

Adjustments to Income

As noted above, driving down your AGI is the best way to minimize your tax liability. This can be accomplished with a number of adjustments.

Adjustments to income could include classroom or education-related expenses, interest paid on student loans, college tuition and related fees, alimony paid, and moving expenses. This list is fairly diverse, but students and parents especially can make a number of adjustments to gross income.

You can review the full list of adjustments from the IRS, and see which ones potentially fit your tax situation.

Charitable Donations

A common way in which individuals reduce their total taxable income is through the use of charitable donations or gifts. This could include any dispersal or donation to a qualified charitable organization.

You will need to itemize any charitable donations. You should also know that not every organization is deemed charitable, even if the organization is exempt from income tax liability.

There are several lists which distinguish between which non-profit organizations qualify for charitable donation tax deduction and which do not. You can do a bit of research and see if a contribution to your charity of choice is tax-deductible.

There are also deduction limits, but these are very high. This is why donations are such a popular way to both drive down AGI and better the community.

Increase Deductions

It’s common for filers to scour their taxes and look for ways to increase deductions. But as noted above, the standard deduction works for the majority of the taxpaying population.

If you opt to itemize your deductions, the best strategy is to keep a spreadsheet or a meticulous system of receipts and invoices of your actual expenses, then compare this figure to the standard deduction. Always opt for the higher deduction.

Having additional dependents or being married will increase the standard deduction for you. You can review the 2018 rates for standard deductions and determine which rate most accurately fits your household.

The largest and most commonly-used deductions tend to be mortgage interest, state taxes, and as mentioned above, charitable gifts or donations. Other common deductions include car registration fees, job-related expenses, and even tax preparation fees.

Medical Expenses

If you incur medical expenses, a silver lining that you can use a portion of these bills to reduce your AGI.

For the 2017 and 2018 tax years, the IRS allows taxpayers to deduct any medical expenses that exceed 7.5% of their AGI. This is good news if you’ve filed extensions for 2017 or 2018 and incurred medical expenses.

For example, if your AGI for 2018 was $50,000, you could deduct unreimbursed medical expenses that surpassed 7.5% of your AGI. In this example, that figure would be expenses over $3,750.

However, as of January 1, 2019, taxpayers can only deduct the unreimbursed amount that exceeds 10% of their AGI.

You cannot deduct medical expenses for which you are reimbursed. This type could include an insurance reimbursement or a reimbursement from your employer. Cosmetic or elective procedures are also not tax-deductible in most cases.

Deductible medical expenses can and do include preventative care, dental, vision care, and surgical procedures. Mental health care such as psychiatric treatments also qualify as deductible medical expenses. Prescription medication can be deducted, as well.

Lastly, fees incurred relating to medical care such as mileage and parking fees can be deducted.

Contributing to a 401(k) or Retirement Plan

It’s likely that your workplace off some type of 401(k) or retirement plan that you will be able to pay into. This is a strong strategy for lowering your gross taxable income while also feathering a nest for yourself in the future.

There are different benefits to paying into different types of retirement plans. Below is brief overview of the different options that may be at your disposal.
401(k) plans are often offered by employers. Employers will contribute a fixed amount to your plan that corresponds with your personal contributions.

The advantage of contributing to this type of plan is that your contributions will likely be made with pre-tax dollars, and that you will not have any tax liability for this money until you accept a distribution.

This can be a very effective tactic for lowering AGI, while also setting yourself up for a better tomorrow.

Meanwhile, a retirement plan such as a traditional IRA (Individual Retirement Account) runs through a bank or brokerage. While there are contribution limits, almost any money you contribute to traditional IRA is pre-tax and not subject to taxes until you make a withdrawal.

While there are always criticisms of any tax system, there are opportunities such as IRA and 401(k) contributions that encourage saving while also lowering tax liability. If you want to minimize taxes, you should explore your retirement plan options, either via your workplace or a broker.

Reduce Taxes and Increase Take-Home

Taxes aren’t fun for anyone, but with some patience and self-education, you can apply some tactics for reducing tax liability while potentially contributing to your future via 401(k) and retirement plans.


Linden Thomas and Company and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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