Did you know that the average American spends around $10,000 per year in taxes?
If you’re tired of paying taxes, you may be looking for a way to reduce your taxes. There are things you can do to help decrease the burden of taxes, but you have to make sure what you do is legal.
Continue reading this article, and we will give you some tips on taxes and how to reduce the amount you pay—legally.
1. Max Out Contributions to 401(k) or Traditional IRA
401(k)s and traditional IRAs are tax-deferred accounts. The general idea behind benefiting from these accounts is to pay taxes later during retirement when you’re earning less income.
If you don’t plan on having a job or a business when you withdraw from your retirement accounts, this may be a good idea for you. On the other hand, if you plan on making a high income from a business or through another source, this might not help in the long-run—even if it does reduce your tax burden now.
2. Consider Employer Benefit Plans
Using employer benefit plans to pay for medical and dental expenses pre-tax will reduce your taxable income.
You might know these benefit plans are an FSA (flexible spending account) or an HSA (health savings account). Keep in mind that you have to use money the year you allot it for in your FSA, but you can roll the money over in an HSA.
3. Batch Your Itemized Deductions
Some medical and employment-related expenses have to hit a certain number before you can claim them. Since that is the case, you might want to wait to pay until the next year or prepay this year to make sure you can get the deduction.
If you aren’t sure what deductions to look at, you can look for people that understand taxes. Many of these people you can get help from are connected to the tax free wealth network and similar networks.
4. Keep Great Records
If you don’t keep a record of deductions, there isn’t any way you can get them. The IRS requires you to keep perfect documentation if you want to claim a deduction.
Have a place to put receipts for charitable gifts, business travel, business entertainment, and other similar deductions.
Also, make sure you keep a record of any cash gifts you get or inheritances. If you can’t prove that you reported the income, you could get in trouble with the IRS.
5. Invest in Municipal Bonds
Investing in municipal bonds is a popular option because they are exempt from federal taxes. Keep in mind that their interest rates are very low, but the tax benefits might be enough to make you want to look into them further.
If you aren’t sure if municipal bonds are the best way to build wealth, you should speak to a CPA or a financial advisor.
6. Know Long-Term Capital Gains Are Best
If you hold onto your investments for one year or longer, you’ll get a better tax rate. Depending on your income, you may even get a 0% tax when you cash in on the investment.
When you hold your investments for less than one year, it will be taxed normally.
7. Start a Business
Starting a business will allow you to deduct a lot of things that you use daily. You may be able to deduct part of your household expenses under the home office deduction if you have a qualifying home office.
Don’t be afraid this is going to trigger an automatic audit because that isn’t the case. More and more people have a home office due to the ability to work remotely through the internet.
8. Get IRS Credits
Don’t miss out on IRS credits. These can make a big difference in how much money you have to pay in taxes.
These are credits for parents, students, and even low-income savers. Look through the available credits and see which ones you qualify for.
9. Donate—Anything
When you donate, you can deduct those donations off your taxes. You can donate just about anything, but you will need proof from the charity that you donated it.
Donating can help you feel good about yourself, but it can also help you get out from under a heavy tax bill.
10. Buy a Home With a Mortgage
When you have a home mortgage, you can deduct your mortgage interest. Keep in mind that you can only deduct the interest if it is used to buy, build, or improve your home.
There are limitations on deductions with home equity loans, so make sure you know the tax laws before you get started.
11. Know When to Sell Your House
Before you sell your home, you should learn about the home sale exclusion rule.
If you follow the rules, you can get a gain of $250,000 without taxation as a single person and $500,000 as a married person if you’re filing jointly. Keep in mind that it must be your primary residence, and you have to have lived there for at least two of the last five years.
You are only able to claim this exclusion every two years, but keeping this in mind can save you thousands of dollars. Selling your home before those two years can mean a rather pricey tax bill.
How to Reduce Your Taxes – Now You Know
Now you know how to reduce your taxes. You may be able to use some or all of these ideas to take some of the burden off at tax time.
Do you want to learn more about taxes and personal finance? Continue through our blog.
