The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. There are three basic ways to reduce your taxes, and each basic method might have several variations – Tyler Lynch, PC is here to tell you how.

The first is reducing income:

Adjusted Gross Income (AGI) is a key element in determining your taxes. Lots of other things depend on your AGI (or modifications to your AGI)– such as your tax rate and various tax credits. AGI even impacts your financial life outside of taxes: banks, mortgage lenders, and college financial aid programs all routinely ask for your adjusted gross income. This is a key measure of your finances.

The definition of AGI is your taxable income from all sources minus any adjustments to your income.

You can also reduce your Adjusted Gross Income through various adjustments to income. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid, and classroom related expenses. Two of the most popular ways to reduce your taxes is to save for retirement, either through a 401(k) at work or through a traditional IRA plan. Contributions to these retirement plans will lower your taxable income, and lower your taxes.

The second is increasing your itemized tax deductions

Taxable income is a key element in your overall tax situation. Gross income reduced by AGI adjustments and itemized deductions is the amount on which your tax is based. Tax payers may choose to take a standard deduction or itemized deductions depending upon which choice is most beneficial.

Itemized deductions include expenses for health care, state and local taxes, personal property taxes (such as car excise taxes), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses. You can keep track of your expenses by using a personal accounting program such as Quicken, or another accounting program.

Next take advantage of tax credits

Now you are ready to focus your attention on various tax credits. Tax credits reduce your tax. There are tax credits for college expenses, for saving for retirement, and for adopting children.

The best tax credits are for adoption and college expenses. Everyone could take some college classes. There are two education-related tax credits. The Hope Credit is for students in their first two years of college. The Lifetime Learning Credit is for anyone taking college classes. The classes do not have to be related to your career.