The purpose of Income Tax planning is to reduce the income taxes paid to federal, state, and local governments. Individuals and families can use two Income Tax Planning strategies to reduce their income tax burdens.

(1) They can Invest in available Tax Advantaged Investment Alternatives.

For example, the investment return provided by investments in municipal bonds is not taxable by the federal government and might also be exempt from state and local income taxes. Various retirement plans allow people to accumulate funds for use in retirement on a tax-deductible and tax deferred basis. People should carefully consider each type of Investment that provides tax advantages.

(2) They can take advantage of tax deductions and tax credits.

The federal Income Tax code allows individuals and families to deduct certain expenses and other amounts from their annual income before calculating their federal income tax liability. Interest paid on their home mortgages, medical expenses that exceed a certain percentage of annual income, contributions to qualifies retirement plans, and amounts contributed to charitable organizations are examples of such deductions. The Federal Income Tax code also allows certain credits to be deducted from an Individual's or a Family's Income Tax Liability. For example, low income workers raising children might be able to use the earned income credit to reduce the amount of federal income tax they must pay.