There are basically three things that can mitigate your tax bill: tax deductions, tax exemptions and tax credits. You need to use every legal tax deduction under the IRS rules. A variety of tax software exists to escort you through the list of legitimate tax deductions. Keep in mind that your income may play a significant role in phasing out some deductions. You need to use your exemptions for yourself, your spouse and dependent children or qualifying seniors that live in your home. Tax credits may be available at lower income thresholds that could offset any taxes due.
The IRS has categories that you can select to use with your tax filing like individual, head of household, married filing jointly or married filing separately. Sometimes the last two categories should be calculated to determine which way saves you more in taxes.
Adjusted gross income may not be the number to look for at the bottom of page one on your 1040 form. It may be modified adjusted gross income on the second page that could really matter. If you are a Social Security recipient, you have to also consider the impact of earnings, retirement distributions and any non-qualified monies that generate taxable income. With few exceptions, most distributions are subject to the provisional income test for Social Security taxation. So managing your taxes in retirement is the new retirement game to learn to keep more of your money in your pocket.
Once you’ve selected your filing category and applied all your deductions, exemptions and tax credits to your gross income, you more than likely will be using the modified adjusted gross income as the final calculation for taxes due or refund payment. We use a marginal progressive tax system in the U.S. After determining what effective tax bracket your in, you then figure out if you can drop your income to lower your bracket to save on your tax bill. Learning to become a tax gamer is all about keeping as much of your hard earned money and retirement dollars in your pocket and not surrendering one dime more to the government coffers.