It is not very known to everyone but as a citizen, it is your right to know what comes under the taxable bracket in your country. It is your hard-earned money and therefore a few strategies can help you save a lot on taxes. At the same time, there is not illegal about these strategies. The only difference is that not everyone is aware of how to reduce taxable income with a few strategies.
How To Reduce Taxable Income?
All incomes are taxable. They are taxed at different levels, from federal to state. Thus paying taxes is an inevitable part of earning money. But all we want is to reduce the amount of taxes we pay each year. There are different strategies and ways through which we can reduce our taxable income. We have listed below different ways to protect your income from taxes.
1. Make Contributions To Your Retirement Account
It is one of the easiest and most widely used strategies to reduce taxable income. Contributions to your retirement account reduce the amount of tax you owe to the Federal. According to IRA and 401K, these accounts are tax-free till you retire. You don’t have to pay any taxes on your retirement account, but your money will grow and you can withdraw it without paying any tax when you get your retirement.
2. Get Your Personal Health Savings Account
Opening a health savings account is another strategic way of reducing your taxable income. If your health savings account is eligible for a high deductible medical plan, your tax deduction will be immediately processed. Tax does not grow on the amount you save in your health account and when needed you can easily withdraw your tax-free asset.
3. Check Your Eligibility For Flexible Spending Accounts
Often if you are not eligible for a personal health savings account with a high deductible medical plan then many companies offer a flexible spending account. A part of your monthly income will get deducted and transferred to these spending accounts. You can withdraw to visit your routine check-ups and by medicine. But the only thing you need to remember is to spend the entire money transferred in this account. At the end of each year, the balance gets forfeited.
4. Claim Business Deductions
This step usually needs additional guidance from an accountant who can point out how you can earn business deductions. From home interest charges to membership, travel fare, long term insurance premiums all can be a form of business deductions.
5. Invest In Long term Capital Gains
For growing your income in folds everybody would recommend you to invest. Investing in long term capital gains helps you reduce your taxable income. You can invest in real estate, mutual funds, stocks and even in bonds to enjoy the additional benefit.
6. Claim a Home Office Deduction
Claiming a home office deduction is one of the easiest ways to reduce your taxable income. If you share your home space and use it as your office, you can easily claim it to reduce your taxable income. The space that is used as an office must be of long term usage and should be a designated area. The rent you pay would get a deduction while tax paying for your shared office space.
7. Rent Out Your Home For Official Meetings
If your home is not your primary space for the business you can easily rent space from your home for 14 days without paying any taxes. The amount you receive by renting out the space should not be more than the rent payable at that location. Additionally, you have to keep all documents properly to use them to reduce your taxable income.
8. Claim Tax Credits
IRS tax credits help you to reduce your overall taxable income through Earned Income Tax credits. To be eligible for earned income tax credit, family size is the first consideration. You can earn credits starting from $475 with married couples with no eligible children to up to $5891 for 3 eligible kids. No credits can be earned for more than 3 kids. Additionally to claim tax credits both the parents must jointly file the tax.
9. Combine Your Vacation and Business Trips
Go for your business trips and occasionally enjoy some vacation too. In this way, you will be able to deduct your taxable part from business trips and still get some good time to spend. The airfare, hotel charges can be easily claimed to reduce your taxable income.
10. Claim Your Higher Education Tax Credits
If you have children who are going to college. Then you are eligible to earn the higher education tax credits. The opportunity lies in the first four years of college with the maximum credit being $2500 per year. However, if you are an adult and want to invest in learning skills for your job you can get credits up to $200 per year.
We are all liable to pay taxes on our taxable income, but why pay extra when the government has set rules that help us reduce our taxable income. We hope that through the ways listed above you will be able to save your hard-earned money and reduce your taxable amount.