It is that time of the year again when everyone has taxes on their mind. Not everyone is born a tax expert and for a layman taxes can be quite a confusing topic. This year confusion has only been compounded given the current economic situation. Plus the temporary stimulus tax breaks for housing, cars and energy efficiency announced has further complicated the situation. Below are few tips that will help you to minimise your tax bill.

The basics first

The age old tax saving rules still applies. This is the time to make charities and invest in tax saving investments. Also we suggest that you give a thought to the kind of accounts for your retirement savings. Until you file your taxes you can fund an individual retirement account for 2009. Before the year end you will however have to declare how much you want to put in the company’s 401(k) plan in 2010 and whether you want to invest the money in a traditional pre tax 401(k) or in a Roth.

Another important question that pops up at this time is whether to prepay state and local income and real estate taxes in December or wait until January? An easy answer would be to pay by year’s end and get the deduction on your federal return earlier. This is applicable if you are not subject to alternative minimum tax. But if you are subject to the alternative minimum tax by which the benefit of the state and local tax deduction is denied then we suggest that you consult a taxation expert to decide. Also many people are postponing deductions for the fear that the marginal tax rates will increase in 2010 and hence a deduction would be worth more next year. There could also be a possibility that the top marginal tax rates could be increased but deductions may be only allowed against a lower rate.

Reduce your Income

It doesn’t take a rocket scientist to understand that the amount of tax you pay is directly related to your Adjusted Gross Income (AGI). Adjusted Gross Income also determines lot of other things like your tax rate and tax credits. Outside of taxes also Adjusted Gross Income impacts your financial life with banks, mortgage lenders and college financial aid programs all asking you your Adjusted Gross Income. Hence it can be said that Adjusted Gross Income is the starting point of all your financial planning.

So what exactly is Adjusted Gross Income? Adjusted Gross Income is simply the sum of your income from all your sources minus any adjustments. Higher your income higher would be your Adjusted Gross Income and hence higher the taxes you would pay and vice versa. But can the Adjusted Gross Income be reduced given your current earning. The answer is yes. By contributing money to a 401(K) or similar retirement plan you can reduce your Adjusted Gross Income and hence reduce your tax bill.