How to Reduce Your Tax Bill with Income Tax Planning

Even in a slumping economy, it is important to consider your income tax planning strategy. The easiest way to reduce your tax bill is to reduce your taxable income. Instead of taking the standard deduction this year, consider itemizing your expenses and/or doing the following things:

Difficulty: Easy

Instructions

Things You'll Need:

• Turbo Tax or other such software
• Brokerage Statements

1. Prepay Some Bills - Interest on home loans is a deductible expense. Your lender will send you your interest information some time in early January. The key is to prepay January's bill in December. Since you are a cash-basis tax payer, the interest amount included in your payment is deductible in the year you actually pay it, not the year it is due.
   
   Interest on personal loans is not a deductible expense.

2. Donate to Charities - Under current US tax laws, you are allowed to deduct donations made to qualified charities. These include non-profit organizations, religious groups, and not-for-profit schools. In order for the donation to qualify, you must keep a record on the gift. If the donation amount is greater than $250, you must also obtain something from the organization clearly defining the character and amount of the gift. Turbo Tax has a new feature that makes this process extremely easy and ensures that your gift's fair market value is properly recorded.

3. Sell Some Losing Investments - The stock market has absolutely tanked this year. You can take advantage of this fact with a little income tax planning. You can deduct up to $3,000 of capital losses against ordinary income each year. If you have some stocks that you think may never recover, sell them anytime before December 31st and reduce your taxable income now. Just remember that any loss greater than $3,000 will have to be carried forward to next year.

Tips & Warnings

• Smart income tax planning can save you hundreds of dollars each year
• Never lie about your donations. Keeping detailed records is an essential skill that you must master when learning to reduce your tax bill with income tax planning!

Resources

• Personal Finance

[pianistic]

on 11/26/2008 Great, thanks!