Tax planning is a critical part of financial planning because it influences so many different areas of your personal life. The average American worked 116 days in 2006 just to pay his or her federal, state, and local taxes.

Preparing your income tax is a seven-step process:

1. Start with your gross income from all sources (less your exclusions).
2. Subtract adjustments to total income; the result is your adjusted gross income.
3. Subtract the greater of your standard deduction or itemized deductions.
4. Subtract your exemptions; the result is your taxable income.
5. Refer to the IRS tax table and calculate your tentative tax.
6. Subtract your credits; the result is your total tax owed.
7. Subtract any taxes already paid. This leaves either the amount of your balance due or the amount of your refund.

Each of these steps is critical to correctly calculating your federal income tax.

There are four strategies to minimizing your tax payments. They are the following:

1. Maximize your deductions.
2. Maximize capital gains income.
3. Earn tax-exempt income.
4. Defer taxes to the future or eliminate future taxes.

By using these strategies effectively, you can reduce your tax liability and the amount of taxes you are legally required to pay.

We concluded with some ideas that may be helpful as you work toward better organization and preparation of your taxes:

1. Be organized with your record keeping.
2. Keep copies of the previous year's tax returns.
3. Keep good records for itemizing deductions.
4. Spend time in December calculating potential investment gains and losses.
5. Make charitable contributions (e.g., tithes and offerings) with appreciated financial assets or other long-term capital assets.

The United States tax system is a progressive, or graduated, tax system. Increased income is taxed at higher rates. The four major taxes are income taxes, capital gains taxes, income-based taxes, and non–income-based taxes.

Taxes are a required part of living in the United States. However, there is no law that requires us to pay more than is legally due. By utilizing the recommendations and ideas in this section, you can fulfill your responsibility as a wise financial steward and legally minimize your tax payments to the government.

The purpose of this section was to familiarize you with the U.S. tax system and help you understand strategies that will help you lower your taxes. Now that you have completed this section, ask yourself the following questions:

1. Do you understand what our leaders have said regarding taxes?
2. Do you understand how tax planning can help you attain your personal goals?
3. Do you understand the tax process?
4. Do you understand how to minimize tax payments?
5. Do you understand the major features of the U.S. tax system?

If you can answer “yes” to each of these questions, you are ready to move on to the next section!