As tax season approaches, many taxpayers look for legitimate ways to lower the amount they owe or maximise their refund. With some strategic planning and proactive moves, you can minimise your tax liability. Read on for simple yet powerful steps you can take to reduce your tax burden.Thank you for reading this post, don't forget to subscribe!
Contribute to Retirement Accounts
One of the smartest ways to lower taxable income is to contribute to 401Ks, IRAs, and other retirement savings plans. The pre-tax dollars you invest in these accounts compound tax-deferred over time. The IRS also allows generous annual contribution limits – be sure to fully fund yours each year.
Claim Credits and Deductions
There are many tax credits and deductions designed to help taxpayers lower their tax bills. Be diligent about tracking expenses related to a home office, education costs, medical bills, charitable donations, parenting costs, commuting miles, and more. When tax day nears, calculate which credits and write-offs provide you the biggest bang for your buck.
Invest in Tax-Advantaged Securities
Financial vehicles like municipal bonds and insurance annuities accrue interest tax-free, allowing your savings to grow faster. Consider shifting a portion of your portfolio into these securities to avoid annual taxes on investment income.
Time Asset Sales Strategically
For investments held longer than one year, long-term capital gains tax rates are lower than ordinary income tax. If your asset sales push income significantly higher for a given year, time the sales over multiple years to stay within a lower bracket. Bunching income unpredictably can bump you into higher rates unexpectedly.
Overpay Quarterly Estimated Taxes
If you typically receive large refunds when you file your return, you’ve given the IRS an interest-free loan. Adjust your quarterly estimated tax payments to better match your expected annual liability. Aiming to break even or owe slightly when you file is financially optimal.
With some planning, monitoring and strategic moves, you can successfully shrink your annual tax bill. Be sure to always consult a trusted tax professional to ensure full compliance. Paying less legally means keeping more hard-earned money in your pocket.