Everyone has heard that death and taxes are unavoidable. Death is unavoidable, but taxes are not. With little tax planning, you can owe the IRS less money at the end of the year.
Here are seven fundamental tax-saving measures you can take to lower your taxable income and the taxes you’ll owe. They do not involve complicated tax shelters or offshore bank accounts. These tools are simple to learn and implement, and they are likely to save you – the typical taxpayer – money.
Step 1: Earn Tax-Free Income.
There are many ways to avoid taxes. One of the best is to earn as much tax-free income as possible. Some of the most common are selling your home (the home sale tax exclusion), saving money for your children’s education, investing in municipal bonds, contributing to a health savings account, receiving health insurance and certain other employee benefits from your employer, and giving some investments to your children.
Step 2: Take Advantage of Tax Credits.
Tax credits are worth as much as, if not more than, deductions. A deduction reduces your taxable income dollar for dollar. Congress has taken a great liking to tax credits in recent years and is adding new ones all the time. Some examples include tax credits for buying a hybrid car or making certain home energy improvements, such as adding a solar electricity panels or a solar water heater to your home. There are also child and child care tax credits and education tax credits.
Step 3: Defer Taxes.
Paying income tax on your taxable income is inevitable, but delaying payment is usually a smarter financial move. By putting off tax payments until the following year, you are essentially taking a loan from the government. You can accomplish this in a number of ways, such as deferring an employer bonus or putting money into an individual retirement account (IRA).
Step 4: Maximize Your Tax Deductions.
Tax deductions are among the most well-known strategies for lowering taxable income. The lower your taxable income, the more deductions you can claim. All costs incurred by a firm, whether they are capital expenditures or operational, are fully deductible. The Tax Cuts and Jobs Act provides a pass-through tax deduction of 20% for most small businesses from 2018 to 2025.
Everyone who files taxes can choose between the standard deduction and itemising. Mortgage interest, property taxes, charity contributions, and state income tax are examples of itemised deductions that are typically of a more personal character. As of 2018, the standard deduction has been almost quadrupled thanks to the Tax Cuts and Jobs Act. Therefore, only those with larger incomes and significant deductions will choose to itemise. It is possible to enhance your personal itemised tax deductions above the standard deduction amount by doing certain actions.
Step 5: Reduce Your Tax Rate.
Capital gains tax rates for those in the 10% and 12% tax bands are zero percent, whereas the top marginal tax rate in the United States is thirty-seven percent. Earnings from long-term assets, such as equities, bonds, mutual funds, and real estate, qualify you for the best rates. You will pay taxes on the money you make from these assets at the reduced long-term capital gains rates rather than the standard rate of income tax.
For high-income taxpayers in the top 35% or 37% tax bracket, the capital gains tax rate on long-term gains is 20%. The capital gains tax rate is 15% for those in the 22%, 24%, and 32% tax rates. People in the 10% and 12% tax brackets pay no tax. When a person’s annual income is over $200,000 for a single person or over $250,000 for a married couple filing jointly, an additional 3.8% Medicare tax is due. In contrast, ordinary income tax rates might reach as high as 37%, and this means that the typical working stiff will have to pay a significant portion of their wage or business revenue in taxes.
Step 6: Shift Income to Others.
To reduce your tax liability, you may want to consider giving money to a family member or other person who is in a lower tax category. The term “income splitting” or “income shifting” describes this practise. The “Kiddie tax” has been modified by the Tax Cuts and Jobs Act to facilitate simpler income transfer to children.
Step 7: Take Advantage of Your Filing Status.
Choosing a tax filing status is often overlooked, despite the fact that it can significantly alter a person’s tax liability. Taxpayers typically have the option of selecting from several different filing statuses, and this decision will have significant implications for their tax liability. When figuring for your standard deduction, your filing status is also very important.
In order to benefit yourself, you need familiarise yourself with the fundamentals of tax preparation. You’ll be much better off financially at tax time if you start using these tactics as soon as possible. Then you can stop worrying about whether or not you’re overpaying the Internal Revenue Service.
