Nobody enjoys paying taxes. But, as Benjamin Franklin famously wrote, the two things that are certain in life are “death and taxes.” If you earn an income, then taxes are pretty much unavoidable.
Thankfully, there are several tax strategies that you can utilize in order to save more money. Some of these strategies might seem obvious, while others might be things that you didn’t even know were possible.
Are you interested in learning more? If so, then continue reading and we’ll walk you through how you can save some serious money on next year’s taxes.
- Invest in Municipal Bonds
Purchasing a municipal bond basically means lending money to a local or state entity for a certain number of interest payments through a set period. After the bond reaches its maturity date, the full amount of the original investment will be repaid to the investor.
What’s so great about municipal bonds is that they’re exempt from federal taxes. Some are also exempt from local and state taxes as well. The fact that you get tax-free interest payments is what makes these bonds so appealing to people.
Historically speaking, municipal bonds have lower default rates than corporate bonds. However, they also come with lower interest rates. With that said, corporate bonds are also taxed heavily, unlike municipal ones.
- Aim for Long-Term Capital Gains
One of the best ways to grow your wealth is through investing. And you can greatly reduce the amount you pay in taxes when you invest in real estate, bonds, mutual funds, and stocks by aiming for long-term capital gains.
If you invest in an asset and hold it for more than one year, then you can end up with a preferential tax rate of zero, fifteen, or twenty percent on the capital gain, depending on what your income level is. If you hold that asset for less than one year before you sell, then the capital gain will be taxed at ordinary income rates.
Understanding the short-term versus long-term capital gains rates is extremely important for growing one’s wealth. For example, a married couple that is filing jointly would pay zero percent on their long-term capital gains if their income falls below $78,000.
An investment advisor and tax planner can help you figure out how and when to sell depreciated or appreciated securities in order to maximize losses and minimize gains. Tax-loss harvesting is an effective tax strategy that can offset a capital gains tax liability by selling securities at a loss.
- Start Your Own Business
Having a side business will provide you with extra income and can also provide you with a variety of tax advantages. When you use expenses in the course of daily business, for example, you can deduct them from your income. This will reduce your total tax obligation.
Also, when you follow the IRS guidelines as a business owner, you might be able to deduct part of your home expenses with the home office deduction. You also might be able to deduct from your income the portion of the internet and utilities that you use for your business.
In 2019, the SECURE (Setting Every Community Up for Retirement Enhancement) Act was passed. This Act allows employers to offer annuities as investment options within 401(k) plans. Also, if you’re a small business owner, then the Act gives you tax incentives to set up automatic enrollment in retirement plans for your employees.
You can also join multiple employer plans and you can offer retirement options to your employees.
- Use a Health Savings Account (HSA)
If you’re an employee with a health insurance plan that comes with a high deductible, then you can also use an HSA in order to reduce your tax obligations. As with a 401(k), money goes into your HSA before taxes. The maximum contribution for 2020 is $3,5550 for an individual and it’s $7,100 for a family.
This money will grow without the requirement to pay taxes on the earning. Also, HSAs come with the added tax benefit that their withdrawals aren’t taxed when the money is used to pay for qualified medical expenses.
- Get IRS Credits
There are a variety of IRS tax credits that can lower your taxes. One such example is the Earned Income Tax Credit. A taxpayer with a low income and no children can receive up to $530 in tax credits.
Other taxpayers with at least three children can be eligible for up to $6,550 in tax credits. Eligible students can receive up to $2,500 in credits from the American Opportunity Tax Credit.
There’s also the Saver’s Credit for lower and moderate-income people who are trying to save for retirement. Individuals can get a credit of up to half of their contributions to a plan, an IRA, or an ABLE account.
Finally, the Child and Dependent Care Credit can help you offset the expenses of raising children, depending on what your income level is.
The Importance of Knowing About Tax Strategies
As we can see, there are many different kinds of tax strategies available to you. You should make sure to review all of the strategies listed above and see which ones you can use to your advantage. If you’re still unsure about which strategies you can utilize, then you should consider going over your financial situation with a tax advisor.
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