Most of us dread the thought of tax filing. Your income tax often reaches an overwhelming amount. This often evokes stress for the taxpayers. However, you cannot avoid paying income taxes as it’s an integral part of your annual expenses. Sounds harsh, doesn’t it? Well much to our relief, there are some great ways through which you can reduce the amount.
Keep reading as we present you with some effective guides to save up on income taxes.
1. Invest in Long Term Capital Gains
If you closely observe, your expense will keep increasing with time; given the economical context and time value of money. To avoid the financial crisis, find means to increase your cash. Thus, investment can be an effective tool to grow your wealth. You can achieve a favorable tax treatment for long-term capital by investing in stocks, mutual funds, bonds, and real estate.
There are great benefits of investing for long term capital gain to save up on income tax. Hence, if an investor holds a capital asset for longer than a year then you can enjoy a preferential tax rate of 0%, 15%, or 20% on the capital gain.
For the year 2022, if your income-tax falls below $83,350 as a married couple and $ $41,675 as a single individual, then will be required to pay 0% on their long-term capital gains.
2. Invest in Municipal Bonds
Investing in Municipal Bonds is an effective means to reduce your expenses. As your bond reaches its maturity, you receive the full amount of the original investment. The interest you receive from municipal bonds is exempt from federal taxes.
3. Put Money in a 401K or IRA
Contribute to a traditional 401K. It will significantly lower your tax expense because 401K contributions are pre-tax. Contributions to a 401K are directly taken out of your paycheck before your income taxes are calculated. Thus, it lowers your total taxable income and subsequently reduces your income tax expenses.
Apart from that, putting your money in the IRA is also a good idea as it’s an effective saving tool. It allows you to save up on paying income taxes by putting up to $6000 in your Individual Retirement Account (IRA).
4. Start a Venture
You can have a side-business along with your job. Side-business offers tax advantages to a great extent. As a self-employed individual, you can avail important tax returns through health insurance premium. According to IRS guidelines, you can get tax deduction for using a part of your home daily for your business. Besides as a taxpayer you can also deduct a portion of utilities and internet consumption for business purposes from your income.
5. Charity/ Donation
If you are an individual who supports various social causes through charity or donation then you have scopes to claim tax deductions.
Note that donations made through cash/cheque are eligible for tax reduction. Based on the donations you can avail 50% to 100% deduction.
6. Utilize a Health Savings Account
Sign up yourself for a health savings account. Health Savings Account contributions to the 401 (K) plan with payroll deductions ensures an exclusion of your taxable income. Your contribution to the Health Saving Account is 100% tax deductible from your income.
For the year 2022, the maximum deduction contribution level has amounted to $ 3650 at individual level and $ 7,200 at family level.
7. Claim for EITC (Earned Income Tax Credit)
The EITC is one of the most significant tax credits that can help to reduce your income tax expense. Based on the amount of your income and number of children; you can claim the EITC credit. For the tax year 2021, a taxpayer with three or more children can claim upto $6,728, with two children can claim upto $5,980 and with one can claim up to $3,618 and $543, if none.
Apart from that, the Child and Dependent Care credit can help you save up a substantial amount from your income tax.
These are the 7 methods you can utilize to save up on your income from income tax expenses. Hopefully this email helps you during this tax-season. Besides, for any other tax related consultancy, contact Ahad&Co, the best tax accounting firm near you.