The tax claim is daunting for any taxpayer. Tax deductions are expenses that are subtracted from the gross income. Choosing a deduction is also a big dilemma. There are two kinds of deduction available. It is difficult to decide if one should go for standard deduction or itemized deduction. A standard deduction is based on a person’s civil status. It depends if a person is single, married, Head of the household and based on that a fixed dollar amount subtracted from his/her gross income. An itemized deduction, which is a corresponding amount for few expenses incurred.
There are three ways to do a proper tax planning- Increase tax deductions, take advantage of tax credits and reduce the taxable income.
There is ample advantage of tax credits available which is obtained from reasons like having children, adopting children, paying tuition fee for college, energy efficiency. The deductions available, depends on the eligibility of the taxpayer.
However there are some common deductions available for every tax-payer. That are-
• Costs of job-hunting
• Job agency fees
• Professional and business related association fees
• Union fees
• Professional books and magazine
• Alimony and other legal fees incurred for payment of taxable income
• Work uniform
• Tax advice and tax preparation fees
• Expenses associated with moving to new job
• Other legal fees
• Donation to charitable trusts
• Business liability costs and insurance premium
• Tuition fees for job-related classes
We have already told you about tax credits and deductions. Now there is another dimension to reduce your taxes. You can do it by “reducing the taxable income.” Tax is chargeable to the adjusted gross income (AGI). AGI means the total earning minus the adjustment to your income. Higher is the income higher will be the tax so one way is to reduce the income. This can be done by contributing to the funds eligible for deductions. As foe example a person can contribute money to retirement fund 401(k) to avail the deductions. A traditional IRA plan also can be adopted to reduce the taxable income.
The tax planning is done in various methods looking at the purpose of the taxpayer. The tax planning can be done on short term basis, medium term or long term basis and the type of investment can be made accordingly. Investing in funds or securities to save tax has its own benefits not only for the taxpayer but also for the entire nation. By investing a person not only is relieved from the burden of tax but also creates future earnings for himself. Investment is one way to make a superbly white economy.
Many of the taxpayer due to the lack of proper knowledge ends up paying more than they need to. So the need of tax planning is certainly very big.