More income may sometimes mean more federal and state taxes. And while taxes are difficult to run away from, some strategies can help you ward them off.
Here are ways to save money on income taxes:
1. File Your Taxes on Time
Failure to file your taxes on time means you face hefty fines. Also, note that the filing deadlines vary depending on the state, so confirm with your revenue department.
2. Maximize Employee Benefits and Retirement Accounts
401(k)s and 403(b)s are popular ways of reducing tax bills. That happens because the IRS doesn’t tax what’s directly diverted from the paycheck in a 401(k) or 403(b).
- In 2022, you can save up to $20,500 compared to $19,500 in 2021.
- If you’re over 50 years old, you may contribute an extra $6,500.
- Although employers fund these accounts, self-employed people may open their accounts. Also, if your employer matches your contributions, you may get free money.
3. Using a Health Savings Account (HSA)
Employees using a high-deductible health insurance plan may need to switch to a health savings account (HSA) to minimize taxes. An increase in deductible maximums to $3,650 for individuals and $7,300 for families in 2022 means your funds can grow. What characterizes the growth is the ability to grow your funds without having to pay tax on the earnings.
4. Take Advantage of Tax Credits
Numerous tax credits help minimize taxes, like the Earned Income Tax Credit. The American Opportunity Tax Credit offers a maximum of $2,500 per annum to eligible students in the first four years of higher education. Furthermore, the Lifetime Learning Credit gives a maximum of 20% credit to $10,000. Alternatively, you might get $2,000 per return.
Another option is the Saver’s Credit for moderate to low-income persons aiming at saving for retirement.
5. Buy Real Estate Property
Buying real estate property is one of the most effective strategies to save more taxes. Depreciation ensures a great reduction in rental income because most rental properties with positive cashflows may also carry a paper loss.
6. Start a Business
Having an additional source of income offers numerous tax advantages. Different income streams mean that you can deduct most expenses from the earnings, which leads to a reduction in your tax obligation.
7. Investing in Municipal Bonds
Investing in these bonds means you lend money to a local or state entity over a predetermined period. At maturity, you receive the full investment amount. In addition, interest received remains exempt from federal taxes, and state and local taxes, depending on your location.
8. Donate to Charity
A charitable donation is a tax-saving strategy used by high-income earners. The different ways to use charitable donations include:
- Set up a donor-advised fund
- Establish a charitable lead trust
- Make cash donations directly to eligible charities
- Donate stocks to avoid the capital gains tax
Using the different tax-saving strategies mentioned above could mean your owe less to the IRS annually. However, because of the consistent changes in the tax code, what works today may not work next year.
Thus, you must conduct a regular review of your tax situation to avoid missing out on saving opportunities.