How to Reduce Income Tax

Ways to Achieve a Lower Tax Bill

Jan 4, 2010
Asa Ghaffar

How to Reduce Income Tax - U.S. Government

If you're looking for ways to reduce your income tax bill, above-the-line and below-the-line deductions could mean less taxation. Find out how to reduce your gross taxes.

You may want to reduce income tax, but the IRS wants to collect it. A U.S. citizen is legally required to file form 1040 with the Internal Revenue Service (IRS) prior to April 15. It covers any applicable tax-related transactions made between January 1 and 31 December of the previous year. Someone with less complex finances, such as no capital gains or losses, may be able to complete form 1040A in order to minimise administration. Regardless of which form needs to be completed, a lower tax bill is the objective of every American citizen.

How to Reduce Income Tax

The amount of federal, state and local taxes owed on 15 April is determined by how much has been earned. Employers will take federal taxes from the employee's wages based on the information provided in their W-4 form. For example, those who are married and have several children will pay less tax than a single person with no dependents. Of course, circumstances can and often will change over the course of the year. Any excess taxes will be rebated.

Pay Less Tax Due to Exclusions

An exclusion, such as paying additional pre-tax contributions to your employer-sponsored retirement account, will allow you to reduces your tax bill. This happens because the individual is able to reduce their gross taxable income.

Above-the-Line Income Tax Deductions

Adjustments to Gross Income (AGI) include student loan interest payments, the interest on a homeowner loan, contributions to a retirement plan and moving expenses. These allow that person to reduce their gross, taxable income in a similar way to exclusions.

A Below-the-Line Income Tax Deduction

Listing items individually in schedule A of tax form 1040 is beneficial when the value of any savings is greater than the standard deduction. The Inland Revenue Service (IRS) website lists all the eligible standard deductions so taking a bit of extra time to provide more specific information could result in a lower tax bill.

Tax Credits Could Lead to a Lower Tax Bill

Receiving tax credits will lower that person's gross taxable income and reduce income tax. For example, if that individual had a gross, taxable income of $3,000 and received $1,000 in tax credits, they would only pay taxation on $2,000 of their gross earnings. The most common credits are Earned Income Tax Credit and the Child and Dependent Care Credit and Education Credits.

Reduce Income Tax

Nobody likes paying taxation as it doesn't produce anything tangible for the individual. Don't rush in form 1040, give yourself time. Consider if any of the above deductions can be used to reduce the gross tax burden as there are a number of ways to pay less tax. The more that individual knows about what can and can't be deducted, the lower your tax bill will be at the end of the financial year.