6 ways to keep money from going to taxes
These tips can help you pay less tax on the money you make.
Federal, state, and local governments all tax income, and earned income is also taxed more to pay for things like Social Security and Medicare. Taxes are hard to avoid, but there are many things you can do to help. Here are six ways to avoid paying taxes on your income.
Key Takeaways
- Pretax contributions to qualified retirement and employee benefit accounts can defer taxes on some income.
- Long-term capital gains have low tax rates.
- Taxes can be cut even more by using capital loss deductions.
- Most of the time, interest income from municipal bonds is not taxed by the federal government.
1. Buy local government bonds.
Municipal bonds are essentially loans to state or local governments for a predetermined number of interest payments over a set period of time. When the bond’s maturity date comes, the buyer gets back the full amount he or she put into it.
Interest on municipal bonds is not taxed at the federal level, and depending on where you reside, it may not be taxed at the state or local level either.
Investors like municipal bonds because the interest payments are not taxed. How to save on taxes
Historically, the rate of default on municipal bonds has been lower than that of corporate bonds. A study of municipal bonds from 1970 to 2019 found that investment-grade municipal bonds had a 0.1% default rate, while global corporate issuers had a 2.25 default rate.
But the interest rates on municipal bonds are usually lower. Some investors are interested in municipal bonds because of their tax-equivalent yield and the tax benefits they offer. The tax-equivalent yield goes up as your tax bracket goes up.
2. Aim for long-term gains in capital
Investing can be a great way to make money grow. Long-term capital gains are taxed more favorably, which is another reason to invest in stocks, mutual funds, bonds, and real estate.
If an investor holds a capital asset for more than a year, the capital gain is taxed at 0%, 15%, or 20%, depending on income.
Capital gains are taxed as income if the asset is sold within a year. . It’s important to know the difference between long-term and short-term capital gains rates if you want to get rich.
For 2021, a married couple filing jointly would pay nothing on their long-term capital gains if their taxable income was less than $80,800, and a single person would pay nothing if their taxable income was less than $40,400.4
For 2022, taxable income up to $83,350 for married couples and $41,675 for single people falls into the zero rate bracket for long-term capital gains.
A tax planner and investment advisor can help you figure out when and how to sell securities that have gone up in value or gone down in value in order to minimize gains and maximize losses.
By selling securities at a loss, tax-loss harvesting can also be used to pay down a capital gains tax bill. If you have more capital losses than capital gains, you can deduct from other income the amount that is less than $3,000 or the net capital loss. If you have more than $3,000 in capital losses, you can carry them forward to later tax years. How to save on taxes
3. Get a business going
A side business can bring in extra money and help you save money on taxes.
Many business expenses can be deducted from income, which lowers the amount of tax that needs to be paid. Health insurance premiums are one of the most important tax deductions for people who work for themselves and meet certain requirements.
Also, a business owner can deduct some of their home costs with the home office deduction as long as they follow the rules of the Internal Revenue Service (IRS) to the letter. The amount spent on utilities and the internet for business purposes can also be taken out of income. 7 To get these deductions, the taxpayer must run a business with the goal of making money. Publication 535 explains the different things the IRS looks at. It is assumed that a taxpayer is running a business for profit if they have made a profit in three of the last five years.
In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act gives tax breaks to businesses that join multiple-employer plans and give their workers options for saving for retirement. 9
4. Get the most out of your retirement savings and employee benefits.
In 2022, you can reduce your taxable income by up to $20,500 if you put money into a 401(k) or 403(b) plan. This is up from $19,500 in 2021.
10 Those who are 50 or older can add $6,500 to the basic amount they put into their workplace retirement plan. For example, a worker who makes $100,000 in 2021 and puts away $19,500 in a 401(k) plan lowers their taxable income to $80,500. 1112
In 2022 and 2021, non-employees can earn a tax advantage by contributing up to $6,000 ($7,000 for individuals 50 and over) to a regular IRA.
Taxpayers with employer retirement plans or whose spouses do may be able to deduct traditional IRA contributions, depending on income.13 How to save on taxes
IRA deductions taper out at higher adjusted gross income levels in 2022 than in 2021.
A single taxpayer, married couple filing jointly, or married person filing separately can take the deduction. It also depends on whether the taxpayer participates in another plan. The IRS has rules about whether you can deduct and how much you can.
Before the SECURE Act, people who had a 401(k) or an IRA had to take out RMDs (required minimum distributions) in the year they turned 7012. The SECURE Act raised that age to 72. Depending on the tax bracket the account holder is in when they withdraw their money, this may or may not affect their taxes. The bill also gets rid of the rule that you could only contribute to a traditional IRA until you were 7012 years old.
Fringe Benefits
Several firms provide additional plans that allow employees to keep their contributions or income advantages in addition to retirement plans. These benefits are normally tax-free on W-2 forms.
Income-based Child and Dependent Care Credits may aid with child and disabled dependent care
5. Use a Health Savings Account (HSA) (HSA)
A health savings account (HSA) can help employees pay less in taxes if they have a health insurance plan with a high deductible. Like a 401(k), payroll deduction HSA contributions (which may be matched by the employer) are not taxed. Contributions made directly to an HSA by an individual are 100% tax-deductible from their income.
For 2021, the most you can deduct as a single person is $3,600 and as a family is $7,200.
16 In 2022, these limits will go up to $3,650 per person and $7,300 per family. 17 Then, these funds can grow without having to pay taxes on the growth. HSA withdrawals for medical costs are tax-free.How to save on taxes
6. Ask for tax breaks
There are many tax credits, like the Earned Income Tax Credit, that lower taxes. In 2021, a low-income taxpayer with three or more qualified children might receive $6,728 in tax credits, $5,980 with two, $3,618 with one, and $543 with none. 19
In 2022, the credit will be $6,935 if you have three or more kids, $6,164 if you have two, $3,733 if you have one, and $560 if you don’t have any.
President Biden signed the American Rescue Plan on March 11, 2021. It gives low- and middle-income people a lot of tax breaks. Only in 2021 will the earned-income tax credit for households without children get bigger. The maximum credit for people without children goes up from $543 to $1502.
The range of ages has also grown.
People without children will be able to get the credit at age 19, instead of 25. Full-time students will still have to be 25 to get the credit (students between 19 and 24 with at least half a full-time course load are ineligible). The age limit of 65 will be taken away. For single filers, the phase-out amount has gone up to $11,610.21 and the percentage has gone up to 15.3%.
The American Opportunity Tax Credit gives eligible students up to $2,500 per year for the first four years of college. Lifelong Learning Credit: 20% on up to $10,000 of eligible expenses or $2,000 each return.
There is also the Saver’s Credit, which helps people with moderate and low incomes save for retirement. People can get a credit for up to half of what they put into a plan, an IRA, or an ABLE account.
The Child and Dependent Care Credit may help with child and disabled dependent care expenditures, depending on income
President Biden’s American Rescue Plan altered the 2021 Child Tax Credit. It will go up to as much as $3,000 per child in 2021 ($3,600 for kids under 5). The age limit for children who qualify also goes up to 17. (from 16). The credit can also be returned in full. The IRS may also give up to half of a household’s credit as an advance payment between July and December 2021. Eligibility will be based on the household’s 2020 or 2019 tax return. 2126
In conclusion
No one must pay more than the government is legitimately owed. Spending a few hours on IRS.gov and credible financial information sites could save you hundreds or thousands on taxes. How to save on taxes
