While you work hard to make money, you sometimes have to work even harder to keep it. Taxes are unavoidable, but don’t settle for paying outrageous amounts each year. By learning about proven legal strategies, tips, and tricks, you can significantly reduce tax requirement this year.
Gross vs. Taxable Income
The problem many people have is they don’t understand the difference between gross and taxable income. Instead, they wrongly believe that everything they make is automatically subject to taxation by the IRS. Thankfully this isn’t true. While your gross income refers to the total dollar amount you earn in a given year, your taxable income refers to a reduced amount that is calculated after deductions and write-offs. As the name suggest, only the taxable income can be taxed.
Strategies for Reducing Taxes
While your career goals probably revolve around increasing your gross income, you should also put some focus on reducing your taxable income. Here are some tips, tricks, and strategies to get you started:
Put money in your IRA:
One of the most popular strategies recommended by financial advisors is contributing money to a retirement plan. When you contribute to a traditional pre-tax IRA, you are able to quickly lower your taxable income – regardless of whether you take the standard deduction or itemize. It’s also important to note, though, that traditional IRAs are not tax-exempt – but rather tax-deferred. The taxes must eventually be paid, but can provide tax relief in the present.
Donate to charity:
One of the favorite ways to reduce taxes is to make charitable contributions. Consider finding a charity related to a favorite cause and donate items as a way of reducing your tax bill. In some situations, it is possible to avoid capital gains taxes on appreciated securities by donating those securities to a charity. This could potentially save you more on taxes than you actually donated.
Earn tax-free income:
There is no better way to avoid taxes than to earn money that can’t be taxed. Tax-free income can be accumulated by selling your home, investing in bonds, saving money for a child’s education, spending a portion of your salary on uncovered health costs, giving investments to your children, contributing to a health savings account, and more.
This strategy doesn’t technically reduce your taxes in the big picture, but it does provide temporary relief. By deferring taxes to a future year, you can essentially receive a free loan from the government.
Share your wealth:
While it is much more difficult to do than it once was, shifting some of your income to your children or someone in a lower tax bracket can substantially reduce your taxable income to very reasonable levels. This is particularly helpful for individuals with large gross incomes.
Similar to the previous strategy, shifting income can be a major help. You can do this at the end of the calendar year by allowing customers an extra-long grace period or extending a deadline. This means payments arrive at the beginning of the New Year as opposed to the current taxable year. It’s essentially a method of deferring taxes to the next year without taking out a loan.
Self-employed individuals are eligible for all kinds of tax deductions. These include business expenses related to shipping, advertising, vehicle mileage, website fees, home internet charges, membership dues, office supplies, and more. Additionally, if you work from home, you can take the home office deduction. This allows you to deduct a percentage of your rent and utility fees based on how much square footage your office takes up.
If you can’t stand owing money at the end of the year, consider increasing your withholdings. While more money will be taken out of your paycheck throughout the year, you will get a large refund when you file.
Understand your bracket:
It’s important to understand which tax bracket you fall under. Depending on how close you are to another bracket, you may need to make some changes to avoid going up a level or to intentionally drop down.
Use a tax professional:
While there are plenty of self-help guides out there telling you how to save thousands of dollars when filing, it isn’t always the smartest idea to handle things on your own. A tax professional understands the intricacies involved with filing taxes and can point out areas that would have otherwise been looked over. Every dollar spent on a tax professional is well worth it. By educating yourself on the various strategies, tips, and tricks mentioned here, you can lower your taxable income this year.