Reducing your taxes can help you keep more of your hard-earned money in your pocket. While everyone’s tax situation is unique, there are several strategies you can use to help lower your tax bill. It doesn’t matter if you are an individual or a business owner, there are strategies to help anyone reduce taxes and keep more of their hard-earned money.
In our guide below, we are going to explore some of the most common ways to reduce your taxes. Read on to learn how you can lower your taxes like a pro.
Deductions Will Help
Deductions are expenses that can be subtracted from your taxable income, lowering your overall tax bill. Common deductions are charitable donations, mortgage interest, state and local taxes, and medical expenses. If your deductions exceed the standard deduction amount, it may be worth itemizing your deductions to maximize your tax savings.
Charitable deductions are when you donate money or items to a qualified charity. Whenever you do donate, make sure you ask for a receipt to have for your records. This total you can deduct from your taxable income.
As far as mortgage interest you can deduct the interest that you pay on your mortgage every year if you own a home. You can deduct any state and local taxes including property taxes to your federal taxes. If you have medical expenses for that year that are over 7.5% of your adjusted gross income or AGI, you can deduct those expenses as well.
Keep in mind that sometimes you will have to still pay more taxes than you can afford to pay back immediately. In this situation, you will need to become familiar with this guide to the IRS Form 9465 so that you can request a monthly installment plan. The form allows you to make smaller payments over a certain period of time to pay back your taxes.
Retirement Accounts Are Your Friend
Contributing to retirement accounts like a 401(k), traditional IRA, or Roth IRA can lower your taxable income. The money you contribute to these accounts grows tax-free until you withdraw it in retirement, allowing you to potentially save thousands of dollars in taxes over time. The exact tax benefits will all depend on the type of account you choose and your income level.
Look Into Tax Credits
Tax credits can be even more valuable than deductions because they directly reduce your tax bill on a dollar-for-dollar basis. Some common tax credits include the Earned Income Tax Credit, Child Tax Credit, and Lifetime Learning Credit. Make sure to check if you qualify for any credits when preparing your tax return.
Investing in tax-advantaged accounts like municipal bonds, tax-deferred annuities, and real estate can potentially lower your taxes. Municipal bond interest is typically exempt from federal income tax, while tax-deferred annuities allow you to postpone taxes on investment gains until you withdraw the money. Real estate investments can offer tax benefits like depreciation deductions and 1031 exchanges.
Call in the Pros
Finally, one of the best ways to reduce your taxes is to hire a tax professional. A tax professional can help you navigate the complex tax code, identify potential deductions and credits, and create a tax strategy that is tailored to your individual situation. While it may require an upfront investment, the money saved in taxes over time can more than makeup for the cost.
Health Savings Accounts
Health savings accounts also known as HSAs are tax-advantaged accounts that can be used to pay for qualified medical expenses. Contributions to these accounts are tax-deductible, plus the money in an HSA account grows tax-free. If you have a high-deductible health plan, consider contributing the maximum allowed to your HSA to potentially lower your tax bill.
Tax Efficient Assets
Investing in tax-efficient assets, such as municipal bonds, can also help lower your taxes. Depending on your state of residence, they may also be exempt from state and local taxes. By investing in municipal bonds, you can earn tax-free income and reduce your overall tax bill.
Tax Loss Harvesting
Tax-loss harvesting is a strategy used by investors to offset capital gains by selling investments that have lost value. By selling losing investments, you can offset your gains and potentially reduce your tax bill. However, it’s important to consult with a financial advisor before implementing this strategy, because there are rules and limitations that must be followed.
Ready to Reduce Your Taxes Like a Pro?
As you can see there are many ways to potentially reduce your taxes, including taking advantage of deductions, contributing to retirement accounts, looking into tax credits, investing in tax-advantaged accounts, calling the pros, maximizing HSAs, tax-efficient assets, and taking advantage of tax loss harvesting. Consult a tax professional to determine which strategies are best for your specific situation.