How to Lower Your Taxable Income

Written by bonnie conrad
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How to Lower Your Taxable Income
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No matter what you do for a living or how much money you make, you may want to keep as much of what you make as you can. Lowering your taxable income reduces your income tax liability, and that in turn reduces the amount of taxes you need to pay. You have a number of options at your disposal when it comes to lowering your taxable income.

Skill level:


  1. 1

    Invest the maximum allowable into your 401k program. Your employer can give you information on how much you can put aside. Some employers limit the percentage workers can invest to 15 to 20 per cent of gross wages. Others allow workers to put in any percentage they wish, up to the allowable limits established by the IRS. For 2010 those limits are £10,725 for workers 49 and under and £14,300 for those 50 and older. The money you invest in a 401k comes out of your paycheck on a pre-tax basis, meaning that your taxable income is lowered by that amount. So if you are 50 or older and earn £32,500 a year, you could lower your taxable income to only £18,200 by maxing out your 401k.

  2. 2

    Establish a traditional IRA and add to the account every year. For 2010, you can invest up to £3,250 in an IRA, plus another £650 if you are age 50 or older. The amount you invest in the IRA can be deducted from your taxable income, lowering your tax liability and allowing you to grow your savings on a tax-deferred basis.

  3. 3

    Save for unexpected medical expenses with a health savings account, or HSA. The money you invest in an HSA can be deducted from your taxable income, which in turn lowers your tax liability. In order to invest in an HSA, you must first have a high deductible health plan, also known as an HDHP, in place. Contact the human resources department at your employer or your insurance broker to make sure your current health plan qualifies for an HSA.

  4. 4

    Invest your personal assets in an index fund instead of a managed fund. Index funds only buy and sell stocks when the underlying index changes, which means they generate very few capital gains. Lowering your capital gains will reduce your taxable income and lower your tax liability.

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