How do you lower Taxable income?

Answer 1

Lose your job, make bad investments, lose money at your business, etc...but seriously, taxable income is determined by a variety of factors so there are various things that affect it.

First your income is added up from wages, investments, businesses, retirement, etc. Then there are tax deductions you can take which reduce your income to come up with your adjusted gross income. Most deductions are for self-employed individuals (taxes, health care, retirement) and these are separate from business expenses claimed to calculate business net income. There are other deductions for certain taxpayers, but you can read about those in the 1040 instruction book for lines 23-36.

If you have certain expenses you may be able to itemize deductions instead of using the standard deduction. Examples of expenses you can itemize are: mortgage interest, property taxes, charitable contributions, excessive medical expenses, and excessive employee expenses. There are a few other things as well & you can get a good explanation in IRS Publication 17, pages 140-201.

Itemizing really saves you the amount your itemized deductions exceed the standard deduction. For example, let's say you have $13,000 in itemized deductions and your standard deduction is $11,400. You're saving $1,600 in taxable income (which is @ $240 in tax at 15%).

Of course, the purpose of lowering taxable income is to lower tax, therefore, don't forget about tax credits. They're usually a better deal than deductions if there's option to do one or the other, like with education credits vs tuition & fees deduction. Of course, it depends on your tax bracket and the way the item is calculated.

The main thing about taxes is to use the benefits the law allows. Many folks pay more in taxes because they don't realize that there are deductions or credits for which they already qualify.