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12 Simple Ways to Legally Minimize Your Tax Burden This Year

Taxes are an integral necessity that is required in every person’s life. Rightfully acknowledged – “The only things in life that are certain are death and taxes” but it doesn’t mean that one should pay more taxes than what is legally required. What this means is that with the right strategies in tax planning, there is a way of achieving the goal of reducing the taxes that you pay every year to the barest minimum using some of these incentives embedded in the tax codes. This helps one to understand how to minimize taxes have some extra income or better still, more savings for other purchases or to save more money. 

Here are twelve tactics to avoid overpaying without breaking the law:

Max Out Retirement Accounts

Contribution to 401(k)s, IRAs, and other retirement plans can reduce your taxable income level in the fiscal year. The funds paid in over the years compound without incurring taxes, and this makes the compound amount larger. The ability to defer taxes on the gains can be a substantial advantage in terms of tax savings over your lifetime. 

In 2023, the limit on contributions made as an employee to his or her 401(k) account is $22,500. In order to continue minimizing taxes, the government also increases contribution amounts to $6,500 for Traditional IRAs and $7,500 for Health Savings Accounts (HSAs). Individuals who are more than 50 years can make extra and catch-up contributions to these accounts.

Itemize DeductionsWisely 

Ever heard that the tax benefits of listing down each and every expense you are allowed to take on your tax return compared to simply taking the standard deduction is wise? But you should itemize correctly by identifying every potential deduction that you could claim under the tax laws. Keep records of all the interest on the home mortgage, state taxes paid, gifts to charities, working expenses, medical expenses, and any other allowable itemized expenses.

Bunch Itemized Deductions

Certain other tax deductions are allowed for only up to a certain extent based on income levels that are predefined. For instance, some credits, such as with medical expenses, are phased out at some income levels, usually once the Adjusted Gross Income (AGI) is equal to or exceeds 7. 5% of the income. 

Clustering of deductions helps in arriving at the best of these tax exemptions at one time. For instance, donating double the amount one used to donate in a fiscal year in the last year of the two years being considered when claiming the deduction . It makes the income for that year to remain low enough to allow for deductions which maybe you may not be allowed in future years.

Invest in Tax-Advantaged Securities

It is also important to be aware that all investments are not treated in the same manner in terms of taxes. However you can beat the taxes by investing in the right components across the savings instruments such as Municipal Bonds, Roth IRAS, Insurance Annuities, Equity Indexed Annuities etc. 

For instance, Municipal Bond interest income comes with the Tax Exemption on Federal Taxes and has the added advantage of Tax-Free growth over time. Like traditional IRAs, Roth IRAs do not place taxes on qualified distributions, therefore making the accumulation and distributions in the retirement era tax-free.

Harvest Investment Losses

Conducting what is known as a ‘wash sale’ refers to the act of selling stocks and mutual funds at a higher cost basis to claim investment losses for purposes of counteracting capital gains made elsewhere in an investment portfolio. doing so reduces your net capital gains for the year, therefore lowering capital gains tax. This means that you can apply as much as $3,000 of the excess net losses every year to offset ordinary income.

Claim Tax Credits

The CTC, EITC, CDCC, and even Education credits like, AOTC or LC are few of the tax credits that are used by the tax authorities to promote some much-needed social and economical activities for the welfare of the society. This direct dollar for dollar reductions against taxes owed offer tremendous tax saving when claimed appropriately.

Therefore, align your families and their expenditure requirements with the available credits and optimise your tax.

Financing Education Expenses Using Special Funds

There exist some tax-privileged and tax-exempt saving schemes that enable payment of education expenses. Donating your money to 529 plans, ESAs, HSAs and 401(k) plans and taking penalty-free distributions for qualified education expenses is one of the biggest tax advantages that can help to pay for college for your children or yourselves. The biggest advantage of such plans is the tax-deferred growth of money and the ability to withdraw the money tax-free.

Contribute to an HSA

A Health Savings Account is the best-known savings account since it has extraordinary tax benefits when properly utilized. Donations are one of the above-the-line adjustments reducing AGI and taxable income of the taxpayer. The growth within the context of an account is completely exempt from taxation. The withdrawals made for the qualified medical expenses come out tax-free at anytime. There are no penalties after the age of 65, it just deducts the amount and taxes it as income.

Consider Gifting Appreciated Assets

Another tactic is to give away assets such as real estate and stocks that have a considerable unrealized appreciation rather than sell and pay taxes. If passed on to others, the recipient gets a carry over to the market price hence eliminating such gains for good for income tax purposes. 

Small Business Strategies

There are various legal ways through which a small business owner can minimize his taxes and also the amount which is payable to the government. Choosing a business structure and accounting methods, properly identifying independent contractors and employees, contributions to retirement plans, providing reasonable employee benefits, claiming business expenses, depreciation, and capital investments meet the requirement of this category.

Hire a Tax Professional

An experienced tax professional understands all the loopholes in the tax code; which is a book containing over 74,000 pages. They can do research and look for Tax deductions and credits that you might have overlooked, explain to you the right exemptions and reductions and guide you away from making terrible mistakes on Tax. While they charge fees that are attributed to deductions on your tax bill, the former usually creates more tax revenues than the latter.

Conclusion

It is an open secret that Benjamin Franklin once remarked, “In this world nothing is certain except for death and taxes. ” Insofar as specific tax laws are concerned, the average individual taxpayer may not hold the power to alter them anyway. But that does not mean that they are out of legal recourse when it comes to reducing their taxes and thereby, saving more of their income for personal financial planning by adopting the most appropriate courses of action. Seek advice from professionals in the field to be able to explore all angles. It is however noteworthy to point out that the effort made towards the journey is worth the investment.

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