Taxes might seem like an inevitable drawback of life, but they play a crucial role in supporting our public services. No doubt, it stings a bit when a significant portion of your earnings are deducted. You might assume that a bigger income would alleviate the impact of taxes. However, it’s crucial to understand that as your earnings increase, so does your tax bracket.
Thankfully, there are strategies to reduce your taxes, allowing you to retain more of your hard-earned income. Here are eight valuable tips for minimising your tax burden:
1. CONSIDER INVESTING MORE IN YOUR RETIREMENT
Apart from setting a portion of your income aside for your retirement, you could save more on taxes by increasing your contribution to this reserve. Traditional 401(k)s and IRAs enable you to contribute pre-tax. Therefore, if you aim to put $10,000 towards your retirement, it can be done before your paycheck is taxed.
2. EMBRACE CHARITY
If you’ve been contemplating contributing to charity, now is a good time to start that generous endeavor. Every donation made before December 31st of each year reduces your tax liability. Remember to keep your receipts for the tax season.
3. HEALTH IS WEALTH
Instead of grumbling about the high cost of health care and picking higher deductibles to lower monthly payments, consider contributing to an HSA (Health Savings Account) or FSA (Flexible Spending Account). These contributions are pre-tax and can be withdrawn tax-free, effectively lowering your taxable income.
4. HOLD ON TO YOUR INVESTMENTS
If your stocks or investments are performing well, resist the urge to sell. Assess whether retaining a high-performing stock could result in a lower tax rate. Also, by waiting until after January 1st to sell, you can avoid reporting the gains in this year’s income.
5. UTILISE DEDUCTIONS
There might be deductions available that you’re not aware of, including school supplies, self-employment costs, alimony payments, charitable donations, or specific medical expenses. There could also be many other deductions based on your unique circumstances. Take full advantage of these.
6. TURN LOSSES INTO GAIN
Losses in investments can be disappointing but can also be used to your advantage. Any losses can offset gains, reducing your tax liability. If your losses exceed your gains, it can also be utilized to deduct up to $3,000 from your taxable income.
7. LEVERAGE THE BENEFITS OF PARENTING
Your children not only bring immense joy but can also offer significant tax deductions. There’s a Child Tax Credit for each dependent child under the age of 17, and if your child is headed to university, there are additional deductions available.
8. SEEK PROFESSIONAL ADVICE
Filing taxes is a complex task. To truly understand how to lower your tax liability, enlisting the help of a tax accountant can be very beneficial. They are well-versed in tax exemptions, deductions, and potential loopholes that could help shrink your tax liability.
While dealing with taxes is a dreaded part of adulthood, remember, the lower your tax liability, the more money you keep. By seizing every opportunity to reduce your tax liability, you can set aside more of your income for other financial objectives.
Have you used any of these strategies to lower your tax liability? Please share your experiences.
