Deductions are great for reducing your tax bill, but even better are ways to reduce your adjusted gross income (AGI). Doing this not only reduces your tax bill, it can also entitle you to breaks (or greater breaks) than before (more than two dozen tax rules are tied to AGI). Here are ways to reduce your AGI:
Take advantage of pre-tax opportunities on the job (check with your employer to see whether they are available):
Salary reduction contributions to 401(k), 403(b) and 457 plans. You save for retirement and the portion of salary added to the plan is not currently taxed.
Flexible spending account (FSA) contributions to pay out-of-pocket medical costs or dependent care costs (separate FSAs are used for these purposes so, if offered by your company, you can have both).
Monthly transit passes through your employer to pay commuting costs that would otherwise be nondeductible.
And be sure you use all your “above-the-line” deductions, which also reduce your AGI. These include contributions to IRAs, alimony, health savings account contributions, and three specifically for self-employed individuals (health insurance premiums, half of self-employment tax and retirement plan contributions). The easiest way to find these is simply to look at the section on Form 1040 labeled “Adjusted Gross Income.”