Though many people work or go into business to make a lot of money, when it is tax time, the purpose of tax planning is to arrange financial affairs to pay as little in taxes as possible. The three main ways to reduce your taxes is to reduce your income, increase deductions, and make use of tax credits.

To reduce income, Adjusted Gross Income (AGI) is what determines the amount of taxes a person needs to pay. Many tax calculations go off of the AGI. For instance, what you can deduct for medical expenses in the Schedule A depends if your AGI exceeds a certain amount. The tax rate and various tax credits depend on the AGI. AGI is a metric when it comes to your finances.

What goes into AGI is your income from all sources such as independent contractor work, salary, bank interest, less any adjustments to your income. The higher the total income, the higher the AGI. The more money a person makes, the more taxes you will pay. Reduce taxes by reducing your income. One way to reduce income is to contribute money to a 401(k) plan. Your contribution to a retirement plan reduces your wages. Notice the W-2 you get at the end of the year will show reduced income, and this lowers your tax bill. Another way is to obtain commuter checks if your employer offers this benefit. Rather than pay after tax, you pay before tax for bus, train, and other public transportation fares. If you pay a lot for medical expenses, consider contributing to a flexible spending plan. You pay for medical expenses before tax.

AGI can also be reduced with deductions. You can also buy medical insurance. If you are self-employed, you get to deduct your premiums. If you do not work for an employer that offers a 401(k) plan, you can contribute to an IRA retirement plan, and make income adjustments. If have student loans to pay, you can deduct the interest paid. There are deductions for alimony paid, and for teachers, they can deduct classroom related expenses.

Taxable income is what’s left after you have reduced your AGI by your deductions. Besides the deductions a person does not need to itemize, a person can reduce income even more with itemized deductions. These include expenses for health care such as doctor visits not covered by insurance, state and local taxes, personal property taxes such as vehicle registration fees, mortgage interest, contributions to charity, job-related expenses such as professional license dues, tax preparation fees, and investment expenses. Throughout the year, prepare for tax season by keeping track of your itemized expenses with receipts for meals out with business clients, mileage tracking for job interviews, and other records.

Your personal exemptions can reduce your income after you itemize deductions. The exemptions depend on your filing status and how many dependents you have. You can increase your personal exemptions by getting married or having more dependents such as having a baby.

After calculating the tax amount, use tax credits to reduce your tax. There are tax credits for college expenses, adoption, college expenses, and retirement.