The IRS received over $4.1 trillion in tax revenue in 2021. If you don’t pay the full amount owed on your taxes, you will be charged with penalties and fines. However, with the help of a seasoned CPA, there are ways to lower your tax burden.
Tax evasion is illegal, but you can lower your taxable income and your tax obligation by utilizing the tax credits and deductions that are available to you.
Ways to Pay Less Taxes
Every taxpayer wants to pay less in taxes and save money. Some people might even think it’s impossible, but fortunately, there are steps you can take to reduce your tax burden.
Following are some of the options to opt for so that your tax payment can decrease. Of course, we always recommend speaking with a CPA who understands your situation before claiming any deductions and credits.
Open a Health Savings Account (HSA)
Opening a Health Savings Account is one of the legal strategies to pay less taxes. An HSA is essentially a personal savings account that you can use to pay for medical expenses.
Money taken out of a health savings account for medical expenses is not subject to taxes. Usually, a high-deductible health insurance plan works better with a HSA.
You can grow your funds in the HSA tax-free and the gains or withdrawals won’t be taxed. However, there are restrictions on how much money you can put into a Health Savings Account. HSA limits fluctuate, but according to the IRS, as of this writing, the limit is $3,600 for single users and $7,200 for families.
If you’re on Medicare, you aren’t eligible to open an account. You can contribute to the HSA until your tax deadline and then apply for tax deductions in the same year.
Contribute to Your Retirement Account
Contributions to retirement accounts are one of the simplest and most popular ways to lower taxable income. Retirement account contributions are not included in taxable income. This consequently reduces your tax liability.
Types of retirement accounts could include:
Traditions IRA’s
These are pre-taxed contributions made to an IRA. For instance 401(K) retirement plans are made for employees of a company. A part of their income is directly sent to the 401(K) retirement plans without tax deductions. This lowers your taxable income for the current tax year and you have to pay less taxes, though you will be taxed upon withdrawal.
Roth IRA
An Individual Retirement Account (IRA) that accepts after-tax contributions is known as a Roth IRA. You can grow your funds in the IRA without any tax imposed on them until retirement. Once you retire, you can withdraw these funds tax-free.
Claim Applicable Tax Credits
Tax credits are a fantastic additional means of avoiding paying more taxes than you have to. A tax credit works by reducing your taxes directly.
It is crucial to claim all the tax credits to which you are entitled to because there are a lot of them available and it can help you save huge amounts of money. Credits are typically preferable to deductions because they can lower your overall tax liability, unlike tax deductions. This is where a qualified CPA comes in. You might be surprised what you’re missing.
Some of the tax credits that an individual can avail of are:
Child Tax Credit
If you have kids, you can be eligible for a $2,000 tax credit for each child. Even if they are not your children, your dependents still count, and you are still eligible for up to $500 per dependent. These credits can be claimed when you file your tax return.
Earned Income Tax Credit
The earned income tax credit has a range of $543–$6,728 depending on filing status and the number of dependents. To qualify for this tax credit, you have to meet the stringent criteria of having less than $3650 in investments and contributing jointly if you are married.
In addition to the tax credits mentioned above, the IRS has a dedicated page explaining tax credits and deductions. Moreover, you can consult with our CPA to have a detailed analysis of your financials and how you can claim tax credits on them.
Home Office Tax Deductions
If you are self-employed or run a side business, you may be eligible tax deductions on the business expenses incurred in your home. The condition to this deduction is that your home is solely being used for the purpose of office-related work.
Your family should not be allowed in that area, and that palace is being used on a regular basis for office work.
Make Charitable Donations
Contributions to charities made using checks, cash, and donations of products, and clothing are all tax deductible. Your taxable income can be reduced to zero if you give away enough money.
Before making a donation, you must know that:
- If you choose to use the standard deduction, you can deduct monetary donations of up to $300 per tax return.
- Those who are married can file jointly and deduct $600 per tax return.
- If you’re donating to a nonprofit organization that is recognized by the IRS only then your contributions are eligible for tax deductions.
- you must itemize your tax deduction for charitable gifts to reduce your tax liability.
- If you volunteer, any expenses you incur while doing so may be tax deductible.
Build Wealth and Income in Stocks
This technique might not work for people who need cash in hand, but for wealthy individuals, this is one of the best tricks to avoid taxes on your income.
If you get paid in stocks and options, you can potentially avoid paying taxes. It entails that a business gives you shares instead of giving you a paycheck, this makes you a shareholder. Stocks are not subject to taxation unless you sell them or get a dividend from them.
Invest in Bonds
One of the safest ways to save your income from taxes is by purchasing government bonds. Government bond investments are safe investments that come with return guarantees and tax-free interest. Principal and interest are paid to the lender whenever the bond reaches its maturity date, and the interest you receive is not subject to taxation.
Contribute to a Flexible Savings Account (FSA)
If your employer offers a flexible spending account (FSA) and lets you deposit money directly from your paycheck into that account, then you can take advantage of some tax deductions.
FSAs are frequently provided by companies for dependent care, dental care, and healthcare. However, there are restrictions on the amount you can deposit, and if you don’t use the funds in the account by the end of the year, your employer will get the majority of it back.
Consult Our Team of CPAs to Ensure Maximum Savings
We have discussed some of the most common ways in which you can reduce your taxes. There are tons of tax deductions that can be availed for tax benefits. But, you can’t take advantage of them without the knowledge and help of a CPA.
It is important to note that falsely claiming tax deductions may result in penalties by the IRS.
If you truly want to lower your tax burden, you can ultimately consult our CPA before settling on any tax reduction method.
