re: Ways to reduce taxable income

There are three different concepts of income to keep in mind. The first is gross income. You can reduce your gross income by incurring losses, or simply earning less income. You can also try to influence the character of the income you earn to minimize your tax liability. This is done primarily through investment decisions.

The second is adjusted gross income. Adjustments to income include things like qualified retirement plan contributions, HSA contributions and certain education expenses. Some of the adjustments to income are limited by types of gross income you earn. Minimizing adjusted gross income is beneficial since some deductions and credits are limited based on a taxpayer's AGI.

The third is taxable income, and it is simply your AGI less allowable deductions. The only discretionary deductions are charitable contributions, and they are limited to a percentage of AGI based on the type of property contributed and the type of organization.

Effective tax planning can be quite complicated as it needs to focus on all three areas, and it should take into consideration multiple years rather than just a single year.