If you are not careful, you may be struggling with avoidable tax liabilities. However, it is possible to lower your taxes with the right strategies. Thus, you need to be proactive with tax planning by analyzing your financial situation and finding ways to avoid certain taxes legally. Here are three tax planning tips to keep in mind.

1. Understand Tax Brackets

It is essential to know the federal tax bracket your income falls into. This will help you know the percentage you are expected to pay from the taxable income, whether as a single or married individual. The rates are usually given yearly by the Internal Revenue Service (IRS).

However, regardless of the bracket you are under, your income won't be taxed using a single rate. This is due to tax deductions, and the IRS always divides your revenue into chunks before taxing. Each portion will be taxed based on the bracket rate it falls into. Hence, it is crucial to work with a tax professional to help you get your calculations right. 

2. Understand Tax Deductions and Credits

Tax deductions and credits are vital factors that lower tax liabilities, but they work differently. Therefore, it can be challenging to decide which option works best for you. First, you need to understand these two terms in-depth.

With tax deductions, you will subtract certain expenses from your income, lowering your taxable income. On the contrary, a tax credit will directly reduce your taxes since you will be allowed to subtract a particular amount from the taxes you owe tax authorities. This strategy offers a dollar-for-dollar reduction incentive. For instance, if you take a tax credit of a certain amount, your tax bill will be lowered by that amount.

Both of these options have their pros and cons. Also, they have rules on who qualifies for them. For example, a child tax credit is only available to parents, and home office expenses deductions can only be used by people who work from home. With the help of a professional tax planner, you should find which one suits you best.

3. Keep Your Tax Records

Tax planning is effective when you have records. Therefore, you should always keep your tax records, including returns and other related documents, such as home records, income statements, receipts of expenses, and investment statements.

A professional can use these records to help you develop a strategy that will lower your taxes. Besides, they will come in handy if you are ever the subject of an IRS audit.

All taxpayers should be well-informed and prepared to minimize tax and avoid making mistakes. Apply the tax planning tips discussed above to make the right calls. It is also advisable to hire tax planning services for the best results.

To learn more, contact a tax planning service.

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