7 money-saving strategies for your personal taxes
With a few easy steps, you can reduce what may seem like unavoidably high taxes owed each year to the IRS. Using these basic tax strategies, the average can benefit from a lower tax bill without starting offshore bank accounts or complex protections.
1. Earn tax-free income
Certain types of income are exempt from taxation, so one way to avoid high taxes is to earn as much tax-free income as possible. Selling your home, investing in or saving for your children’s future, and investing in mutual bonds are a few or the tax-free forms of income that might be a good fit. Other strategies include contributing to a health savings account, receiving health insurance and other benefits from your employer, and pending some of your salary on out-of-pocket health costs.
2. Take advantage of tax credits
Tax credits reduce your taxes dollar for dollar, which is something deductions do not do. Every time Congress decides to add a new credit, such as for new home energy improvements or buying a hybrid car, you are taking advantage of some serious reductions. Other common credits include child, child care and education tax credits.
3. Defer taxes
No matter what, taxes are unavoidable. Most of the time, it is best to pay off your taxes sooner rather than later, but deferring payment of taxes to a future year is an option. To do this, you can postpone an employer bonus or invest in IRAs and other retirement accounts.
4. Maximize your tax deductions
People with more deductions, pay fewer taxes. It’s that simple. Business owners can deduct all their business expenses, ranging from office equipment, vehicle expenses, travel and operating costs. Every taxpayer, regardless of whether or not you own a business, however, is also entitled to a standard deduction or itemized deductions. Itemized deductions include interest on home mortgages, property taxes, charitable contributions and state income taxes.
5. Reduce your tax rate
Federal income tax rates cover a wide range – from 0% to nearly 40%. Those who earn income from long-term investments can benefit from the lowest rates available. Profits earned from investments like stocks, bonds, mutual funds and real estate are taxed at long-term capital gains rates, which are lower than federal income tax rates. This year, the capital gains tax rate on long-term gains is 20% for singles with at least $400,000 income or $450,000 for married couples filing jointly. For those in the 25%, 28%, 33% and 35% tax brackets, the capital gains rate is 15%, and for those in the 10% and 15% tax brackets the rate is zero.
6. Shift income to others
For those in high tax brackets, shifting income to family members in a lower tax bracket can help you save a substantial amount in your own taxes. While this method, known as income shifting or splitting, has become more difficult in recent years, it can still be a practical tax tool for taxpayers with high income.
7. Take advantage of your filing status and tax exemptions.
Your tax filing status can have a tremendous impact on the taxes you pay each year. Often, taxpayers have a choice, which actually determines which tax bracket you fall into. This simple selection can determine standard deductions, personal exemptions, and income levels for phase-outs of itemized deductions and personal exemptions. Tax
exemptions vary, so it is crucial to understand which exemptions you are entitled to.
While not everyone can take advantage of tax exemptions due to income restrictions, it is important to know the personal exemptions allowed for you and your spouse and dependent exemptions for children and other family members.
Learning about tax basics can be crucial in helping you get the most out of your tax return each year. The earlier you learn these tax saving strategies, the better off you will be when tax season hits. Make sure you are not paying more than you should to the IRS by studying up on the basics first.