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Financial Planning For Your Future

Updated on February 17, 2016

Know Your Taxable Income

Taxable income is calculated by first summing the gross income which includes all wages, salaries, bonuses, tips, gains from sales of assets, income from pensions, annuities, lottery, and gambling winnings (Gitman & Joehnk, 2005). Once you have a total of the aforementioned items, you then subtract exemptions for dependents you support, including yourself. You then deduce from the total, itemized deductions such as home interest, student loan interest, property taxes, medical expenses, business expenses.

Once you obtain that taxable income, you can apply any federal credits such as earned income credits, child care credits, student credits and you will reach your liability or refund amount due.


Tax Adjustments and Deductions

Tax adjustments and deductions are calculated by summing your exemptions for dependents you support as well as itemizing deductions. Itemized deductions include mortgage interest payments made that tax year, student loan interest paid, medical expenses, business expenses, alimony payments and more. When determining your itemized deductions, researching what qualifies as a legal deduction is important to ensuring you do not deduce an amount from your income that does not qualify. When reviewing deductions, you can take a standard deduction that the government allows for your filing status (which is important) or you can choose to itemize. If your itemized deductions are higher than the standard deduction, you should choose to itemize. For homeowners, often itemized deductions are more beneficial as interest on mortgage can exceed the standard deduction alone. Single non home owners typically benefit more from standard deductions because their legally allowed itemized deductions are not as high. Gitman & Joehnk (2005) stated itemized deductions include:

• Medical and dental expenses (in excess of 7.5 percent of AGI)

• State, local, and foreign income and property taxes; state and local

personal property taxes

• Residential mortgage interest and investment interest (limited)

• Charitable contributions

• Casualty and theft losses

• Job and other expenses (in excess of 2 percent of AGI)

• Moving expenses. (p. 32)

Deductions also include exemptions, which are typically the number of dependents a person supports. Currently I support myself and my son, so my exemption amount is 2, which the government also deducts from the AGI when considering my taxable income. (Gitman & Joehnk, 2005)

A taxpayer can reduce their taxes legally. A taxpayer should always research all available legal deductions, exemptions, and tax credits when preparing their taxes to obtain minimum tax liability. New tax laws are introduced throughout the year. Researching new laws, subscribing to websites that provide updates on new laws, and ultimately talking to a tax professional regarding their qualifying deductions can help a taxpayer legally reduce their taxes through knowledge of programs, credits, exemptions, filing statuses, and laws that reduce a taxpayers taxable income.



Did you know claiming the maximum exemptions on your pay check can result in you owing taxes?

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Top Ten Things To Do When Tax Planning

The top 10 things taxpayers should do when tax planning is

  1. Start with researching the tax laws. Often new laws are put into place at the beginning of the new year for the previous year’s taxes. Sometimes they are not available to tax software when taxpayers first file in January. Researching for new laws can save a tax payer from an audit for noncompliance.
  2. Know what tax credits a taxpayer qualifies for. Tax credits are amounts by which a taxpayer’s total liability is reduced, not the reduction of your taxable income. This is more beneficial as it deducts from the overall amount owed to the government.
  3. A tax payer should not choose so many exemptions to withhold from his paycheck during the year. Oftentimes, people will go to a website and input their income and dependent information, website credibility is important when relying on this information. People I have spoken to, often relay they’ve claimed too many exemptions and they owe an amount they were not prepared for
  4. Save receipts for any and all deductions to prepare for an audit to prove a tax payer had deductable expenses.
  5. If taxpayer is an investor, or multiple property owner, get a tax preparer to assist in filing. Not only will they have the knowledge regarding all allowable deductions, a lot of companies will offer to pay for any errors if an audit occurs.
  6. File on time to avoid unnecessary fees, and if the taxpayer is unable to file on time, file for an extension.
  7. Another tool in tax planning is going to a website to plan what he may owe at years end if he chooses to withhold maximum deductions. The IRS provides a calculator which is reliable. If a taxpayer wants to have more money per paycheck, but to also ensure he will not owe, use this method to plan.
  8. Choose a great tax service that is online. Oftentimes they will inform taxpayers of new laws, there are links for questions as to whether a taxpayer qualifies for a credit, deduction, or other questions regarding schedules and forms. The site asks questions regarding filing categories that a taxpayer may not think of such as military service, disabilities and medical expense deductions. The sites can also offer electronic filing which allows a taxpayer to have a tax return direct deposited. This option gets refunds to a taxpayer much more quickly than a mail in return.
  9. A taxpayer should always ensure he chooses the correct filing status. Some choose the incorrect status like “head of household” because he is a single home owner. A qualifying taxpayer must have a qualifying dependent to choose this status. If married, research to find whether filing jointly or separately will reduce the overall liability for the household.
  10. Finally, Always review, review, review the tax return. A taxpayer is submitting to the government that the data is accurate. An incorrect social security number, invalid deduction, or false information can lead to delayed tax returns, audits, and even criminal charges if you falsely provide information, even “in error”.

Snapshot of Resources for Tax Planning

Resources Online for Tax Planning

Many resources are available to assist taxpayers with their tax-planning needs. A great site is this is the most valuable site. All income tax information, laws, credits, deductions, and calculations, and forms are available on this site that taxpayer needs to learn new laws, research new forms, or current forms, input calculations to determine the tax year’s liability.

Another helpful site is I use this site as mentioned above, they inform me of all new laws, provide links with explanations regarding qualifications, inform me of errors in my return, and offer electronic filing. They also offer premium packages to pay for any errors if you purchase the package and will assist in any audits.

Per Gitman & Joehnk, ( 2005) a great source to visit is “You can link to the tax section of H&R Block’s Web site to locate an H&R Block office near you, learn the latest tax news, and access tax calculator sand advice”. (p. 13)

Another site that may be useful to a taxpayer is this site provides Wall Street information regarding stocks for investors, news on money, investing, tax law changes and more. When planning for taxes, this information is invaluable because it keeps a taxpayer up to date on all things “money”.

A legal site that is valuable to a taxpayer interested in new tax laws is this website has state by state tax laws, updates for new laws, definitions and tax form information, as well as links to income and tax calculations.

Finally, is a comprehensive website outlining mortgage interest information, treasury bill information, tax law information, calculators for mortgages, savings accounts, investments, credit cards and more. Not only valuable for tax planning when calculating taxable income and deductions, but for overall personal savings in investments, deposits, income, and large purchases.


Tax Planning Advice from the Experts

Conclusion: Plan Ahead

It is important to have tax-planning strategy as part of the personal financial plan because people pay 33% of their income to taxes. This amount includes federal taxes, social security, local taxes, sales taxes, and state taxes. (Gitman & Joehnk, 2005) This is money you cannot count on as “bring home pay”. Creating a budget includes taking away money that you will not physically have and preparing to pay when you are legally required to.

Planning is important to any financial strategy, and the most important part of any plan, is planning for required tax payments. You must fit the payments into your budget, whether you like it or not, by planning, you can ensure you don’t overpay, and that you get the most out of adjusting your income per laws and deductions that are allowed.


  • Gitman, Lawrence J., & Joehnk, Michael. D. (2005). Personal Finance Planning. Thomson.


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