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How do I lower my taxable income?


One sure way to reduce your taxable income is to take full advantage of employer retirement programs like 401(k) or 403(b) plans (the first is for private-sector workers, the second is for employees of public education institutions and nonprofit organizations). The same goes for individual retirement accounts, although you may not be able to deduct some or all of your IRA contributions if you participate in a workplace plan and have income over certain thresholds.

Every dollar contributed to employer plans or IRAs, up to prescribed limits, is treated as one fewer dollar earned for federal and state income tax purposes. Not only that, but employers typically match contributions, although not necessarily dollar for dollar, and these receive the same tax treatment. And if you’ve got kids or grandkids that are likely to go to college, even if not for a while, a 529 plan offers a state, but not federal, tax break, and like the retirement plans investment gains accrue tax free.

Another way to reduce taxable income is through judicious allocation of income and expenses to different years. Say you’re married and you have deductible expenses for mortgage interest, property taxes, medical expenditures, charitable donations, etc., that are roughly equal to the standard deduction of $12,200 for married couples filing jointly. You could accelerate some expenses to 2013 – make an early mortgage payment or two, bunch up donations, prepay your 2014 property tax bill and so forth – so that your total deductions exceed $12,200. That means you will have correspondingly less to deduct next year, but you can still take the standard deduction.

-Conrad de Aenlle