Tax Planning Basics: Four Ways to Reduce Your Taxes

Tax Planning Basics: Four Ways to Reduce Your Taxes

tax refund

It’s also a good idea to avoid additional taxes by not taking early withdrawals from an IRA or 401(k) retirement plan. The amount you withdraw will become part of your taxable income and, on top of that, there will be additional taxes to pay on the early withdrawal itself.

One of the best – and most abused – tax credit is the Earned Income Credit (EIC). Unlike other tax credits, the EIC is credited to your account as a payment. And that means it often results in a tax refund, even if the total tax has been reduced to zero. You may be eligible to claim the EIC if you earn less than a certain annual amount.

Increase your withholdings.
You can use extra withholdings on one type of income – such as wages – to avoid paying estimated taxes on another type of income – such as interest, dividends or capital gains. And there’s a special benefit to this approach: extra withholdings that come late in the year are treated the same as if they were spread evenly throughout the year. Money will be taken out of your paycheck throughout the year, but you will get a bigger refund when you file your taxes.

To increase the amount of federal income tax withheld from your paycheck, file a new Form W-4 with your employer. There are two ways to increase your withholding on this form: reduce the number of allowances you claim or request an “additional amount” to be withheld from your paycheck, on line six of the form.

For answers to your tax questions, visit,