Income goes through more tiers in terms of taxes, whether it comes to federal taxes, state and even more local levels. There are additional levels based on what kind of income you generate too. Headache is part of the game when the tax season approaches, but luckily, there are ways to sort things out.
While it’s nearly impossible to avoid taxes, the truth is there are strategies you can use to ease this burden.
Municipal Bonds Can Help
Governments require money in order to make sure citizens are looked after. Whether it comes to schools, roads or public services, money can be raised in more ways. Municipal bonds represent some of the most popular options out there.
To avoid taxes, you’ll need to hold bonds until they’re mature. You’ll make money with interest. And if the bonds are mature, you’re exempt from federal, state or local taxes. This isn’t a general rule though, especially if bonds are purchased at certain discounts.
While considered usually safe, municipal bonds do have some risk. If the city or town issuing the bond runs into financial trouble, they might have trouble paying you back. So always check the financial health of the place before investing.
When facing the IRS representation service regarding such investments, make sure you know what you’re doing or hire a professional.
Launch a Business
A side business provides plenty of benefits when it comes to taxes, mainly because expenses can be deducted from your profits if they’re used along the business needs. For example, if you’re self employed, you can even deduct the health insurance premium.
Do you need the Internet for your business? Travel? Tires for your vehicle? Car insurance? A phone? Utilities and other similar expenses that target the business can also be deducted, meaning you’ll pay tax for less profits.
Of course, you need to conduct business with the purpose of making a profit in order to claim everything. There are more factors to take into consideration and the IRS will definitely pay attention to them.
Claim Tax Credits
This is one of the best options to reduce tax. Based on your income, you’ll have to pay a certain percentage to the IRS. There are more tiers here, with most people falling in the 20% category.
Now, if you’re eligible for tax credits, it’s important to understand how they work. Let’s say you can claim tax credits worth $5,000. This money won’t be deducted from your income, which would obviously reduce the tax. Instead, it comes off the tax you owe to the IRS on your income.
Talking about tax credits, there are more options out there:
- Child tax credit – If you have children, this can lower your tax bill by quite a bit.
- Earned income tax credit – If you are doing a job and earning a low to moderate income, this credit can give you a good refund.
- Other tax credits – These could be for things like education costs or making your own home more energy-efficient.
Each credit has its own rules. For instance, the child tax credit depends on how many kids you have and their ages, while the EITC depends on your income and whether you’re single or married.
Long Vs. Short Term Capital Gains
Investments aren’t all about making money in the long run, but also about playing the tax game like a pro. Whether you go for real estate, bonds, mutual funds or stocks, long term capital gains can reduce taxes by 0%.
There are more tiers on capital gains, usually 0%, 15% or 20%. It depends on the income level. However, if you sell assets within the first year, it’s taxed at general income tax rates. It’s important to know that the zero rate bracket changes from one year to another.
It’s a task that requires thorough planning, so you may want to consider talking to an investment advisor about it.
Get a Healthy Safety Account
An HSA is excellent for employees who already have a high deductive health insurance plan. Similar to how 401(k) works, HSA contributions aren’t considered part of the taxable income. The direct contributions to the HSA will be tax deductible from the income.
The list goes further than that though:
- Max out retirement accounts.
- Work on the W-4.
- Educate yourself on the 401(k).
- Consider an IRA.
No matter which options you go for, it’s critical to time everything correctly.
In conclusion, wrapping up tax season can be a breeze with a bit of planning. By following these five strategies, you not only save money but act as a responsible citizen. Every bit counts, so jump in, make it work for you and feel good about doing your part.
