| How to Pay Income Taxes, Part 1 |
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Paying income taxes can be distressing. But for many people, using simple, lawful techniques can save thousands of tax dollars. Bunch your itemized deductions for maximum tax savings. If your itemized deductions usually come close to the standard income tax deduction amount, try what tax advisors call "bunching" your deductions into a single year. For instance, you could make two years of charitable contributions in a single year (actually giving more in one year, and then taking the next year off). This increases that year's allowable deduction. The next year, when you don't contribute to charity and don't have enough expenses to itemize, you'd take the standard deduction. By doing this, you get an extra benefit in the itemizing years and lose little (if anything) in the alternate years. Bunch miscellaneous deductions to realize a greater tax benefit. Miscellaneous deductions such as tax preparation costs and employee business expenses only show up as a benefit after they cost you more than 2 percent of your adjusted gross income (AGI). If you can combine those expenses (say, paying for continuing education every other year), you could increase the chance of getting a tax break instead of losing the benefit every year because the first 2 percent of AGI gets ignored. You might also apply this to out-of-pocket medical expenses, which have a threshold of 7.5 percent of AGI. Avoid spending just to get the tax benefit. If you are in a 25 percent tax bracket and you spend $100 on something you don't need merely to get the tax deduction, you might save $25 in taxes, but you've still lost another $75 to do it. Don't lose money chasing a tax deduction. Spend based on your needs and your lifestyle, not on how you can get a slightly larger refund. Remember that saving on your income taxes won't force you to give up anything but time. Reducing what you spend on, say, clothing probably means you'll have fewer outfits to wear. But to reduce your tax bill, you might not have to give up anything but some time, mostly for the proper record keeping. And you'll still be able to use the national parks, interstate highways, and other services that your tax dollars pay for. |
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