Taking Advantage of Tax Breaks The formula for determining tax liability begins with your gross income, which includes just about everything you earn. Your adjusted gross income (AGI) excludes “above-the-line” adjustments such as pre-tax retirement plan contributions. Finally, any exemptions and deductions are subtracted from your AGI to arrive at your taxable income. Retirement Savings When you participate in an employersponsored 401(k) or 403(b) plan, you can allocate a percentage of your salary to your retirement account every pay period. Because contributions can be made with pre-tax dollars, they are an effective way to reduce your taxable income. The maximum annual contribution is $22,500 in 2023. If you will be 50 or older before the end of the tax year, you can contribute an additional $7,500. (Contribution limits are indexed annually for inflation.) The funds in your account will accumulate tax deferred until withdrawn, when they are taxed as ordinary income. Withdrawals prior to age 59½may be subject to a 10% federal income tax penalty. Some smart financial moves may help reduce your tax liability.
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