5 Easy Steps to Lower Your Taxes
Taxes are inevitable. But there are a number of steps you can take to make sure you don’t pay more than you have to. Here’s a quick look at five steps to help reduce your taxable income. Remember these are basic strategies that all taxpayers need to know. These are easy to understand, and you can put them to use to lower your taxes and save your hard-earned money.
- Earn tax-free income: Some income types aren’t subject to tax at all. So, one of the best ways to avert taxes is to earn tax-free income. But how to do it? There are a number of ways. The most common ones are – contributing to a health savings account, saving money for children’s education, investing in municipal bonds, saving money for children’s education, availing employee benefits from your employer, etc.
- Defer income: You know that you can’t escape taxes, and you have to pay them sooner or later. But it is better if you can pay it later, right? Because deferring taxes to the next year is like getting a free loan from the government. But how do you do it? There are many ways, from postponing a bonus from your employer to investing in an individual retirement account or other retirement accounts.
- Income shifting: Income shifting isn’t a new concept. It is mostly used by people who are in the high tax bracket to decrease tax liability. Income shifting is also called income splitting. This tax planning technique helps you transfer income from high tax bracket taxpayers to low tax bracket taxpayers. So, you can simply shift your income to your children. The Tax Cuts and Jobs Act made changes to the “Kiddie tax” that make income shifting to children easier. This may seem fishy, but this way of lowering taxes is legal if you stay within the IRS guidelines.
- Make charitable contributions: If you make charitable contributions, you can reduce your tax bill to a great extent. You can donate household items, money, toys, furniture, etc. Remember that these donations are tax-deductible only if the charitable corporation is a qualified nonprofit organization. Remember that the time you spend volunteering isn’t tax deductible but expenses you have while doing the volunteer work may be deductible. For example, travel expenses when you are attending a charitable event.
- Take advantage of your filing status: Only a few people think of their tax filing status, but do you know it can have a considerable impact on the taxes you pay? Yes, as a taxpayer, the filing status you choose will decide the tax bracket that you will be in. Your filing status will be crucial for calculating your standard deductions.
If you learn these basics, you can considerably save a lot of money that you would otherwise be paying as tax to the Internal Revenue Service (IRS). The quicker you apply these strategies and take advantage of them, the better you will be at tax time.