How do I optimize my taxes so that I keep the most money possible?

We're glad you asked. Isn't this really, in a nutshell, the main question? Most Americans give up between 30% and 40% of their income each year in taxes. A pitiful and growing number pay 50% of their income if you count all the other taxes citizens pay in addition to income tax. Thankfully there are ways you can decrease the amount of money you payout for taxes. It takes some time and effort on your part to plan and execute the best tax strategies so you don't end up paying half of what you earn each year. Many of those strategies are discussed with some detail here on site.

Most of the strategies and information we discuss on tax-deduction-tips.com are about income taxes, with the occasional information about other types of taxes. For even more detailed instructions, reference is often given to other resources to refer for deeper specifics.

Before we begin looking at individual strategies, it is important to first take a quick overview. Look at the whole forest first, so to speak, before selecting what trees might be inour way. First a handful of terms. Let's make sure we are all speaking with the same tongue.

To Wit: Total Income, Adjustments to Total Income, Adjusted Gross Income, Standard Deduction, Itemized Deductions, Taxable Income;

That should be enough for today. First,  Total Income:  In our valiant attempt to be consistent with the IRS, we will use the term total income to be the number from line 22 in your 1040. To put it succinctly it means all your income. Not just wage income not just earned income not just active income. Everything. All your various forms of income added up and rolled up into one number. All your income for the year. Total Income. Whew.

Okay,  Adustments to Total Income:   There are about a dozen catagories of deductions you get to subtract right off the top from your Total Income. Subtracting out these adjustments will result in a leftover amount of income known as your Adjusted Gross Income. These dozen or so catagories you get to lop off right at the start include such things as: contributions you made to your IRA, certain moving expenses, certain specific educator expenses, student loan interest paid, and there are another seven or eight other such catagories of expenses. Many people refer to these catagories of deductions as "above the line" deductions. Which is just as good a description as "adjustments to total income". The important thing is to segregate these in your mind so as not to confuse them with "itemized deductions" which a person puts on schedule A. Adjustments to Total Income go right there on the front page of your 1040 right after you added up your total income. They are a different animal than the miscellaneous itemized deductions which you will claim on your schedule A.

Now we're getting somewhere. Next. Adjusted Gross Income:   As we just explained above, Adjusted Gross income is the fancy name for the amount of income you actually had at your disposal after you paid out for all the catagories of payments known as "adjusments to total income". Total Income - Adjustments to Total Income = Adjusted Gross Income. Got it?

We have now arrived at the first interesting topic. Should a taxpayer take the Standard Deduction or should she Itemize Deductions on schedule A. An easy rule of thumb for most people is that you should go with whichever of the two choices gives you the highest amount of deductions. This is not exactly correct, because you have to reduce your total miscellaneous itemized deductions by 2% of your income. If you are in a spot where it is a close call, you should obviously calculate your tax bill under both paths and see which path ends up being a lower total tax for you for that year. Having said all that let's get back to our definitions.

Standard Deduction. IRS Standard Deduction 2009 is $5,700 for singles, $11,400 for marrieds filing jointly and $8,350 for that more rare breed known as filing head of household. The standard deduction is available for you if you want it. The only reason you would not want it is if you come out better off by itemizing your deductions. After you look at your numbers both ways, pick the best way for you.

We're almost done.  Taxable Income:  Starting with your Adjusted Gross Income you now get to deduct another handful of things before you know your tax bill. You get to deduct off your exemptions. You get to deduct off either your standard deduction or your itemized deductions. What you have now is known as your Taxable Income. Your Taxable Income is the Income you gotta pay taxes on. Your tax on your taxable income can be easily looked up in the IRS tax rate tables. Some lucky people will have some tax credits which are even better than deductions. If you have some tax credits you will get to apply those against what tax you owed on your taxable income. If you're lucky enough you might even get back money from Uncle Sam even though you owed a tax on yoiur taxable income just because you had so many credits to apply against your tax you owed.

Now that we've agreed on what the specific terms are we can ask questions and answer them in a way that we are all talking about the same thing.

I often get asked, for example: What is my tax percent? or What is my personal rate? What most people mean when they ask this is better answered mathematically: Your Tax Bill / Your Total Income = Your Effective Tax Percentage. If you've done a good job with your tax strategies, you might get this number down pretty low, perhaps even under 10% of your total income. If you haven't done a good job with deductions and adjustments to total income and credits and defering income and everything we've just talked about and will talk about in future segments, you might be one of those poor souls with an effective tax rate over 40%.

Now that we've taken a nice overview of the big picture, it's time to dig into some of the specific deductions and strategies in the pages of tax-deduction-tips.com. Go to the second installment in the basic-tax-strategies module:
          Reducing Taxable Income