How Not to Pay Federal Income Tax

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There are many ways to reduce federal tax liability, including child care credit and earned income credit, which can be explained with federal tax preparation software. Find out how to reduce federal tax liability by taking advantage of 401k plans or flexible spending accounts with information from an independent CPA in this free video on federal income tax.

Part of the Video Series: Tax Help
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Video Transcript

My name is Miranda Chook, a CPA. There are many ways that you can reduce your federal tax liability and we're going to talk about a few of those today. First of all there are a lot of deductions and credits that are simply overlooked by taxpayers. This includes the child care credit and earned income credit for example. Now one way to find out about these deductions and credits is to use any kind of available free federal tax preparation software and you can find these at the IRS' own website at irs.gov. And this software will help you walk through and hopefully identify some deductions and credits you weren't otherwise aware of. You might also want to use the software even if you take the standard deduction. It can help you compare what would happen if you itemized your deductions and see which one would be more advantageous to you. Most of the time if you are financing your principal residence, your home with a bank loan and the majority of your bank loan is going to pay off interest at the moment, then you probably want to itemize deductions. Now another way to reduce your federal tax liability is to take advantage of some of the plans your employer offers such as 401k plans or FSA, Flexible Spending Accounts, these are plans where you tell your employer to withhold certain amounts for your benefit to use later on but there's no requirement to withhold any federal income tax on them. Now keep in mind that taxpayers are what is called on a cash basis so you might want to consider paying the second installment of your property taxes for example during the tax year then you can also take the deductions for those in the tax year. Now a fifth way to reduce your taxes is to think about those infrequent life events that happen to you because sometimes those have positive tax benefits. For example perhaps you've made a move in order to take a new job. Some of those expenses may be deductible and perhaps you've purchased a new home, again interest you're paying to finance that loan may be deductible. Now you've probably heard about the deduction or the tax benefit for realizing losses on your stocks. Now that makes sense, but only if you've recognized gains during the year on those stocks. So if you've sold some stock or mutuals funds during the year and made some money, you might want to consider selling some stocks that aren't doing so well, that are in a loss position and offset some of those losses against those gains to take the tax benefit, reduce the tax effect of those. And finally don't forget about some non-cash deductions you can take such as charitable contributions. Keep receipts if you donated used clothing, an old bicycle or even donated a car because again, those can be deducted. Now keep in the mind the balance between deductions and the tax benefit because there's not necessarily a dollar for dollar reduction. Now tax credits however will reduce your tax liability dollar for dollar. So for more ideas on how to reduce your taxes, you actually can go to the IRS website for more information at irs.gov or consult and experienced financial adviser to see what other things may be available to you and your specific circumstances.

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