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Five Ways to Lower your Income Taxes
Everyone who works and earns income through salaries or investment in any country has an obligation to pay personal income tax. Businesses are also obliged to pay corporate income tax. Tax is an important component of a country to provide basic services to their citizens; from education, health care, security, infrastructure and social services. It is a law and everyone should comply with it. A nation's progress depends on the tax collected from its citizens. It is the country's life blood. Without tax, there will be chaos and no government to oversee and administer the country.
Income tax rates may vary from progressive, regressive or proportional. Progressive tax is progressively applied as earnings reach higher levels. Let us say tax is 12% on the first 10,000, then 15% on the next 5,000 and 20% on the next 5,000, and so on. Regressive tax is applied to a certain amount such as taxing only the first 20,000 earned. Proportionate tax is based on proportions as set by the government. Therefore, tax planning and tax strategies should be prioritized so that you can minimize your income taxes and reduce financial exposure.
Your tax is going to be based on your gross income, that is, all money income from all sources like salaries, bonuses, allowances, investment, professional fees other benefits. This gross income will then be lessened by your personal exemption depending on your status; married, single or head of the family. The number of your dependents will also have corresponding additional exemptions. The difference between gross income minus all the exemptions is called the taxable income. These are all standard on an income tax return.
|But there are five more ways to lower your income taxes. The best way
to lower your taxable income is to increase your deductions by doing the
itemized approach rather than the standard approach. First, charitable contributions
not only give you a philanthropist feeling, it can also help lower your
income tax payable as a valid deduction. Whatever you donate, keep the receipt,
or if no receipt is available, you may draw up an affidavit or anything
in writing stating the name of the charitable organization, the date and
the amount of donation made. Second, investment in your retirement or pension
account can also help lower your income tax. The more you contribute the
lower income you would have. Third, pay extra mortgage payment, because
when you pay more, additional interest is added, and this interest can be
claimed as a deduction from your income. Fourth, pay your property tax,
real estate taxes also qualify as a deduction. Fifth, medical or health
care expenses can also boost an added deduction from your taxable income.
Remember to keep track of your itemized expenses throughout the taxable
year by using a spreadsheet together with your receipts on an orderly chronological
file. You should be prepared in case a tax audit arises.
You may also take advantage of tax credits for adoption and educational college expenses. Avoiding early withdrawal from your retirement fund is also a disadvantage as this will constitute an additional income and therefore additional income tax.
With all these in mind, even if you are not an accountant or a tax advisor, everything is just a matter of common sense, truthfulness and prudence. Income tax filing is your duty to your country. If you love your country, file your taxes on time.
Because we all can be smarter with our money.