| Wouldn't you like your money to stay at home rather | | | | loan interest deductions, tuition and fees, and |
| than going to Washington? | | | | self-employed health insurance deductions. |
| That can be done by proper income tax planning. | | | | Take a look at each line to see which expenses for |
| Income tax planning is an interesting activity because it | | | | which you qualify (or could qualify next year). |
| is based on "voluntary compliance", meaning that | | | | These are the most effective ways to reduce taxes |
| income tax is a tax that is not "compulsory", but one in | | | | and are called "above-the-line deductions", because |
| which citizens "voluntarily comply" with the Code. Let's | | | | they are taken before adjusted gross income is |
| not go down the rabbit hole of legalities and logic of | | | | calculated. A deduction means that a dollar spent |
| this oxymoron, but instead look at common sense | | | | lowers your taxable income by a dollar. |
| strategies to reduce our yearly income tax liabilities | | | | Itemized Deductions |
| within the Form 1040, our US Individual Income Tax | | | | The next area that can provide some tax relief is |
| Return. | | | | Schedule A, Itemized Deductions. |
| Go get a copy of Form 1040 for 2009. | | | | If you have enough deductable expenses to itemize |
| The strategy is simple. Earn as much income as we | | | | (more than $11,400 married filing jointly for 2009), then |
| can, but structured in a way that keeps line 37, | | | | you can benefit from additional expenses. These |
| adjusted gross income, as low as possible. | | | | include mortgage interest, some types of taxes, |
| Income | | | | charitable gifts, casualty losses, and other |
| The first section of interest is the Income section (lines | | | | miscellaneous deductions. These deductions do not |
| 7-22). This section has a breakdown of just about | | | | provide the same assistance in lowering your taxes as |
| every source of income one can have so that it gets | | | | the above-the-line deductions because of certain |
| reported. As a professional practice owner it should | | | | limitations and phase-outs embedded in the Schedule |
| become clear that one would want to keep salaries | | | | A. |
| and taxable interest to a minimum, as well as ordinary | | | | Tax and Credits Section |
| dividends. Net income from business activities | | | | On page 2 of the Form 1040, we have the Tax and |
| demonstrates how important it is to be astute in legally | | | | Credits section. Here you calculate your taxable |
| deducting every expense possible so the net profit is | | | | income and the tax owed. From lines 47-53 and 63-67, |
| minimized. This is where the greatest tax benefits are | | | | there are tax credits, which are credits against the tax |
| realized. The corporate/partnership return will list all of | | | | due dollar-for-dollar. Included here are child tax credits, |
| the deductible expenses and the net profit from this | | | | education credits, and retirement savings contributions |
| form will be transferred to the 1040. | | | | credits, among others. You may or may not qualify, but |
| IRA and pension distributions should be kept to a | | | | it doesn't hurt to check. |
| minimum (that means not spending the money, | | | | As previously mentioned, the biggest income tax |
| especially prior to age 59½). Unemployment and | | | | breaks come in at the business level. There are |
| Social Security benefits would also be kept to a | | | | several Code sections that provide tax relief to |
| minimum if you have other sources of income to | | | | small-business owners. Many of these advanced |
| handle expenses. | | | | strategies are summarized on my website so that you |
| Take a look at each line to see how it could be | | | | can get an overview of some of the strategies |
| lowered (without actually lowering your income). | | | | available to you. |
| Adjusted Gross Income | | | | This is the basic strategy for reducing one's income |
| The second section from line 23-37, is Adjusted Gross | | | | tax liability on an annual basis. |
| Income, or adjustments to income that lower that | | | | Perusing the Form 1040 can give one a headache, but |
| number for the year. Some of these adjustments | | | | the effort may be worth it if any money can stay at |
| include health savings account contributions, IRA and | | | | home rather than going to Washington. |
| qualified plan contributions, moving expenses, student | | | | |