While paying taxes is your civic responsibility, it isn’t exactly a pleasant experience. This is mainly due to the complicated process and documentation involved. Those papers, however, could actually help you save a significant sum, considering that you employ proper strategies. Below are some basic income tax planning strategies that could help reduce your taxes:
Maximizing Your Tax Deductions
Doing so would lower your taxable income. Depending on your preference, you could take itemized deductions or standard deductions for mortgage interest, dental and medical expenses, property taxes, mortgage points, business expenses, state income taxes, and charitable donations, among others.
Earning Income That’s Tax-Free
When you earn tax-free income, you could automatically reduce your tax liability. To do this, you could invest in bonds, sell your primary residence, deposit funds for your kid’s education plan, open a healthcare savings account, as well as leverage employer benefits such as education assistance, life or health insurance, dependent care assistance, or disability insurance.
Maximizing Your Tax Credits
This could reduce the specific amount of taxes you need to pay. The Internal Revenue Service (IRS) provides tax credits for first-time homebuyers, earned income, dependent and child care credit, retirement contributions, education credit, as well as adoption.
Making Contributions to an FSA
Contributing to a Flexible Spending Account (FSA) is also a great way to reduce your taxes, as these are not subject to federal or employment income taxes.
Making Contributions to a 401k
When you contribute to a 401k, you could reduce your taxes by lowering your taxable income. Your pre-tax money would be directly deposited into your 40k retirement account, with any growth considered tax-deferred.
Paying Your Healthcare Bills
You need to itemize your tax deductions, so you could deduct certain healthcare expenses, which would, in turn, reduce your taxes. Qualified healthcare expenses include your personal expenses, your spouse, kids, and other dependents. Note that you are only allowed to deduct healthcare expenses that go over 7.5% of your adjusted gross income.
Donating to Charitable Organizations
You could make itemized tax deductions for contributions to charitable organizations. You could deduct gifts of cash, stock, and even non-monetary donations such as vehicles, supplies, etc.
Selling Losing Assets
You could further lower your tax liability while taking advantage of losses you incurred on a qualified investment or asset. You need to have taxable losses and gains, however, to be eligible for this particular deduction.
Shifting Your Income
This involves shifting your income to your child that’s grouped in a lower tax bracket to lower your income tax. The main goal of this income tax planning strategy, as Cantley Dietrich and other industry experts explain, is to reduce your adjusted gross income and decrease your tax liability.
Depending on your specific circumstances, there might be other ways to lower your tax liability. However, it’s crucial to remember that tax laws could change at any time, and that tax fraud, even unintentional, could lead to severe consequences like hefty fines and imprisonment. With that said, having an experienced tax lawyer in your area by your side when planning for tax time could mean the difference between significantly reducing your taxes and getting in trouble with the IRS.