Paying taxes can be a real worry if your income for the year has been increased in any way. Paying taxes is always a burden for anyone. There might be hardly any people who happily and willingly pay their taxes. There are ways to reduce either your taxable income or tax liability.
There are some expenses which can help you reduce your taxable income. These are known as ‘Adjustments to Income’ which reduce your gross income and hence indirectly decrease your tax load. The various adjustments that can reduce your taxable income are:
1. Educator Expenses: The IRS states that if you are a qualified educator and if you have had some unreimbursed expenses related to your class then you can claim them as adjustment to reduce your AGI. You should be a teacher, instructor, principal, counselor or an aide from Kindergarten to Grade 12 and must have completed 900 teaching hours to claim these expenses.
2. Moving Expenses: During the assessment year, if you have moved for a new job or to seek work you can deduct the moving expenses incurred by you. But if part of it is reimbursed by the employer then you can deduct only the unreimbursed portion. You must also meet the distance and time tests given by the IRS every year. You need to report the expenses on Form 3903.
3. SEP, SIMPLE and 401k plans: If you are self employed, there are various retirement accounts you can contribute to. SEP, SIMPLE and 401k plans are designed for self employed taxpayers and contributions to these accounts are deductible as an adjustment to income.
4. Alimony Paid: If you are legally separated and pay alimony to your spouse for his or her maintenance, then you can deduct the amount of alimony paid from your taxable income on your return. The amount should not include child support or any non cash payments.
5. IRA deduction: You can contribute to various Individual Retirement Accounts for securing yourself in old age. You can contribute in types of IRA accounts, Traditional or Roth. Contributions to a Traditional IRA are deductible and even the distribution from the same is taxable, whereas, the contribution to a Roth IRA is not deductible neither the distribution is taxable.
6. Student loan interest: The interest paid on any qualified student loan is deductible as adjustment to income. It may be paid for yourself, your spouse or a dependent. The amount of deductible interest has a limit which is decided and updated by the IRS every year. The deductibility also has certain income limits. Taxpayers with income less than some amount, fixed by the IRS, only are liable for this deduction.
7. Domestic Production Activities Deduction: Business dealing in domestic production activities like manufacturing, selling or leasing, construction or engineering in the United States can take a deduction of certain percentage from their income as deduction. It was started as 3% in 2003 and was 9% in 2010. Form 8903 should be attached.
8. Early Withdrawal Penalty: When you withdrew some money from any account before its maturing, you are charged a penalty. This penalty amount is deductible on your tax return.
After calculating your gross income, the above mentioned adjustments are deducted from your gross income. This is known as the AGI (adjusted gross income). It a very important factor in your tax return as it is base limit for ratifying your other credits or deductions. Now that you know all the deductibles that can decrease the amount of your taxable income you can plan your taxes better with expending more in these particular deductibles. For there is nothing better than reducing your tax liability, if you are a taxpayer.
