If you have not already started preparing your federal income tax for 2011, you will need to do so soon. Before you know it, it will be April 17—the final day you can file your 2011 federal income taxes unless you file an extension—and you will be scrambling to get your taxes completed on time.
While you are preparing your taxes, you obviously should be sure they are done right. More than that, you should be sure that you take steps to pay the minimum amount of tax you legally owe. After all, you will only have legal problems with the Internal Revenue Service (IRS) if you underpay or otherwise make an error that shorts the IRS out of taxes that you owe. As a rule, if you over pay your taxes, you will not hear from the IRS and you will be the only one hurt.
Here are six steps you can take to minimize the federal income tax you have to pay, leaving you more of your hard-earned money to live on.
Reduce taxable income. There are several ways you can reduce your taxable income. These ways include:
- contributing to a tax-free fund for your children’s college education such as a 529 plan
- contributing to a health savings accounts through your employer or elsewhere
- contributing to a retirement account such as a 401k
- investing in municipal bonds
Take advantage of tax credits. Tax credits are amounts you can subtract from the calculated federal income tax you owe, often because the government is offering the tax credits to encourage certain behavior. Tax credits are better than deductions, as they reduce the actual calculated tax amount you would otherwise owe dollar for dollar. Common tax credits include the following:
- first-time homebuyer credit
- dependent care credit when you pay someone to care for your child while you work
- dependent child credit when you have a child you care for
- adoption credit to offset expenses related to adopting a child
- elderly or disabled credit
Defer your tax payments. Deferring your tax payments, which is most commonly done by investing in certain retirement accounts such as an IRA, is like obtain a free loan from the government, as it means you can use more of your money now on living or other expenses.
Take advantage of itemized deductions. There are literally hundreds of itemized deductions that you can take from your federal income tax. Itemized deductions reduce the amount of your income subject to tax. Common itemized deductions including the following:
- Medical expenses
- Real estate taxes
- Home mortgage interest
- Charitable contributions
- Unreimbursed expenses related to your business
- Losses as the result of theft or disasters
Increase investment income earnings. Money earned for working, whether it is a salary or hourly wage, is subject to a fairly high tax rate, whereas investment income is often subject to a much lower tax rate relative to that for salary or wages earned.
Use the best available filing status. If you are married, then in general, filing as Married Filing Jointly is a better option from a tax standpoint than is filing as Married Filing Separately or Head of Household. Therefore, you should not use these other filing statuses unless there is a good reason recommended by your tax preparer.
If you need help preparing your federal income tax return and being sure you pay only the tax you owe, you should speak with a tax attorney. Aside from the training, knowledge, and experience a tax attorney will have related to tax credits, itemized deductions, and federal income taxes in general, only a tax attorney can offer you the attorney-client privilege that will keep the attorney from having to testify about any discussions you have with him in a court of law.
- Tax return: Do I need to file taxes for 2011? (taxlawhome.com)
- Federal Income Tax and Injured Spouse Relief (taxlawhome.com)
- Federal income tax significant events, Part 10 – Death (taxlawhome.com)
- Federal income tax significant events, Part 6 – Retirement (taxlawhome.com)
- Federal income tax significant events, Part 5 – Disabilities (taxlawhome.com)
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.