Taxes are a significant expense; every dollar saved can make a difference. As the tax season approaches, many individuals and businesses seek ways to minimize their tax burden, maximize their savings, and achieve their financial goals.
However, taking proactive steps to minimize your tax bill is important rather than waiting for a refund. By understanding the various deductions and credits available and making smart investment choices, you can reduce the taxes you owe and keep more of your hard-earned money.
So, if you aim to decrease your tax liability, here are some practical strategies to help you lower your tax bill and take control of your finances.
- Maximize Tax Deductions
To reduce your yearly taxes, maximizing tax deductions is an effective strategy. You can achieve this by itemizing your deductions rather than claiming the standard deduction. It enables individuals to cut various expenses, including medical and dental costs, state and local taxes, mortgage interest, and donations.
Finally, consider making charitable contributions to qualified organizations, as these are deductible on your tax return. However, having the necessary documentation to support your donations is crucial.
- Convert Traditional IRA Funds to a Roth IRA
One way individuals can minimize their tax burden is by converting traditional individual retirement account (IRA) funds to a Roth IRA. It can be a great strategy, but it’s important to understand the tax implications. When you convert to a Roth IRA, you’ll owe taxes on the conversion amount in the year it takes place. So, if you’re considering a Roth conversion, planning and understanding the tax consequences is crucial. One common question people have is, ‘when do I pay tax on Roth conversion?’ The answer is that you will owe taxes on the converted amount in the year that you make the conversion.
Consult with a financial advisor or tax professional to help you navigate the process and make informed decisions.
- Sell Inherited Property
Inheriting a property can be both a blessing and a burden for individuals. While it can provide you with rental income or housing, it also requires significant financial resources to maintain or pay property taxes.
If you are in the latter situation, selling the property can be wise. It reduces your tax burden since you will only pay taxes on the capital gains generated from the inherited property. Hence, you save significant property tax and pursue other investments or fulfill other potential financial goals.
- Restructure Your Business Entity
Restructuring your business entity can be a wise decision to minimize your tax burden and optimize your business operations. You can take advantage of tax benefits by restructuring your business depending on its type and structure.
For example, if you operate a sole proprietorship or a business in partnership, restructuring as an S corporation can help you reduce your self-employment taxes and access tax credits and deductions unavailable to other structures. For big businesses, restructuring as a Limited Liability Company (LLC) or C corporation can offer greater asset protection and increased tax planning and management flexibility.
- Maximize Tax Credits
Individuals can lower their tax bills by maximizing tax credits. It is just as important as maximizing tax deductions. Tax credits can directly reduce your tax bill by the amount of the credit.
Several tax credits are available, including the child tax credit, earned income tax credit, first-time homebuyer credit, education credit, and child and dependent care credit. The availability and amount of these credits can vary each year, so you must check which credits are available for the tax year you are filing.
Maximizing tax credits can lead to significant yearly savings, but eligibility requirements and income limits may apply. For instance, the child tax credit is for taxpayers with children under 17, and the earned income tax credit is for taxpayers with earned income below specific thresholds. So, know these criteria and limits to be eligible for the credits you claim.
- Opening a Health Savings Account (HSA)
Utilizing a Health Savings Account is a viable option for individuals to decrease their tax burden. It is a tax-advantaged savings account intended to aid individuals with high-deductible health plans (HDHPs) to save for medical expenses.
Contributions to an HSA can reduce your taxable income, and the funds in the account can be used tax-free for certain medical expenses, including deductibles, copays, and prescriptions.
One additional advantage of an HSA is that the funds can be carried over from year to year, allowing you to save for future medical expenses and potentially build up a significant balance over time.
- Take Advantage of Flexible Spending Accounts (FSAs)
Those employed in an organization can use employee benefit plans like Flexible Spending Accounts; to lower their tax burden. These tax-advantaged accounts allow you to allocate pre-tax funds for eligible expenses.
FSAs come in two types: healthcare FSAs, which cover medical, dental, and vision expenses, and dependent care FSAs, which cover childcare expenses.
Contributing to an FSA can significantly decrease your taxable income and save you thousands of dollars on your taxes. However, it is important to note that FSAs have a “use-it-or-lose-it” provision, so any unspent funds at the plan year’s end are forfeited. Nevertheless, some employers offer a grace period or a carryover option that allows you to use funds from the previous year’s account.
To participate in an FSA, you must enroll during your employer’s open enrollment period, carefully assess your expenses, and contribute only what you anticipate using during the plan year.
- Profit From Investment Losses
Investing in stocks and securities can be an effective way to build wealth for individuals, but it is possible to experience losses. However, losses can provide an opportunity to minimize taxes via “tax-loss harvesting.” This method involves selling underperforming investments to offset capital gains and decrease taxable income. If losses surpass gains, you can use up to $3,000 of the remaining loss to offset ordinary income, such as wages or self-employment income. If any losses are remaining, they can be carried over to future tax years.
- Invest in Tax-free Municipal Bonds
A good strategy for individuals to reduce their tax burden is to invest in tax-free municipal bonds issued by state and local governments and exempt from federal taxes. Some bonds may also be exempted from state and local taxes.
Municipal bonds are typically low-risk investments with lower interest rates than other bonds. Still, their tax benefits make them a wise investment option, especially for retirees seeking a steady income. If needed, you can also opt for bond insurance in order to make your life a bit easier.
- Donate Appreciated Assets
Donating appreciated assets is a tax-smart way to support a charitable cause while minimizing your tax burden. By donating stocks, property, or other appreciated assets to a charity, you can avoid paying capital gain taxes on the appreciation and receive a deduction. This strategy can be especially advantageous if you have held the asset for a long period and the value has increased significantly.
With several tax-saving strategies, you can reduce your tax burden and increase your savings. It is important to stay informed of the ever-changing tax laws and consult a professional tax advisor to ensure you utilize all available strategies.
By taking advantage of the abovementioned strategies, you can achieve your financial goals and secure a prosperous future. So, start taking action today and reap the benefits of minimizing your tax burden while maximizing your savings.
The content Team Writer is one of the writers from our team of content writers. The Business Goals blog is expanding day by day and we need more writers and brand ambassadors for promoting our media website. If you are interested contact your portfolio through the Write for Us page.