During tax season, taxpayers are required to report income which include wages, interest earned, dividends, retirement and other distributions, business net profits, capital gains and/or losses and any adjustments to income. Also, taxpayers are reporting their household situations whether married, single, and/or filing with dependents.
Lets take a look at what makes up your Total Income which is line 22 on 1040 form.
Wages, salary, tips, commissions Self-employment income
Income from dividends
Total IRA distributions
Income from alimony payments
What determines your taxable income: Adjusted Gross Income, personal exemptions and standard/Itemized deductions.
How to lower your ADUSTED GROSS INCOME(AGI)? Why is it important to understand how your AGI affects your tax liability?
There are several options to take advantage of in order to lower your AGI.
Health Savings Account
Moving expenses (Make sure your expenses qualify before deducting)
Self-Employed Retirement Plans
Self-Employed Health Insurance
Student Loan Interest Payments
Tuition and fees expenses
A household AGI is important because it is a crucial factor to determine if you qualify for certain deductions and credits. If the AGI is too high or too low, then certain deductions and credits will start to phase out or not apply. The household AGI could also affect the amount student financial aid awarded. It affects Earned Income Tax Credit, Personal Exemptions, etc. Your AGI is a determining factor used to determine your taxable income.
What are some credits that will decrease the amount taxes you owe and if you properly plan and have records/documents to prove you are allowed to deduct?
College tuition documents whether for taxpayer, spouse or dependents
Child and Dependent Care documents for Childcare or Adult-care
Retirement Savings Contributions (Certain Retirement Plans)
Take note of the many options to lower your tax liability the legal way. With proper tax planning early on in the year, plays a important part in you not being surprised when you go to file your taxes. Remember, if you have questions or need to sit down to plan out how to lower your taxable income,
research the accountant or tax professional to ensure the company operates with integrity and honesty. There is no reward in doing something only to later find out you were committing tax fraud whether you knew about it or not. Proper planning is KEY.
To help you collect all the payments you need, use a payment reminder. This will also help you keep track of payments throughout the year. Using an online contract and online invoice will also ensure that you are following all the necessary rules.