• There are many legal ways to reduce tax liability.A young woman holding a pen, doing her taxes image by Christopher Meder from Fotolia.com
  
  For many people, tax planning is not their favorite thing to do. It is, however, important for taxpayers to understand their tax picture well in advance of April 15. Most tax reduction strategies require advance planning and implementation in order to be effective. Both individuals and businesses may be able to reduce tax liability by planning ahead and using basic tax reduction tactics.
  
  

Stock Strategies

• Not all of the income generated by investing is taxed at the same rate. Stock dividends, for example, are taxed at a more favorable rate than other types of investment income Because of this, investing in stocks that pay dividends rather than in bonds and other securities that pay cash can help reduce tax liability. Keeping stocks for a year or more before selling them is another tax reduction strategy. The tax rate on proceeds from the sale of stocks held long term is less than the tax rate assessed on stocks held for less than one year.
  
  

Put the Kids to Work

• Owners of an unincorporated business can reduce the business’s tax liability by hiring young friends and family members. Children under the age of 18 are not subject to the FICA tax. This saves the employed child money since she doesn’t have to pay the tax and it keeps the business from having to match the 7.65 percent tax payment. In addition to saving on the FICA tax, employers can also save on the federal unemployment tax (FUTA). Employers who employ their own children do not have to pay FUTA taxes for that child if he is under 21.
  
  

Always Review the Deductions

• Many taxpayers who don’t benefit from itemizing their deductions mistakenly assume that there are no deductions available to them. There are, however many credits and deductions than can save these taxpayers money. Even if a taxpayer doesn’t itemize, she may still be eligible for above-the-line deductions related to paying alimony, college tuition, early withdrawal penalties on savings, self-employment tax and student loan interest. Deductions are also available to reduce the tax liability of self-employed individuals who pay for their own health insurance. A wide variety of tax credits are also available related to educational expenses, adoption, foreign taxes, retirement saving and dependent care. Many taxpayers miss out on these credits and deductions, however, by simply not looking for them.