Getting paid for your hard work is always rewarding, but seeing a large chunk of it deducted as tax can be disappointing. While some people may use tax loopholes to reduce their tax burden, the average person may not know how to minimize their tax expenses. In this article, we will explore seven simple strategies to pay less tax and keep more money in your pocket.
1•Reduce Your Taxable Income
Most developed countries have a progressive tax system, meaning that as your income increases, you pay more tax. Conversely, when you make less money, you owe less tax. Luckily, there are ways to earn a good income and lower how much tax is applied to it, also known as your taxable income. One of the most common methods of reducing your taxable income is by contributing to retirement accounts, such as a tax-deferred 401(k) plan.
Although you will still have to pay taxes on these earnings later when you withdraw the funds, the amount you contribute for the current year reduces how much money is subjected to tax. Long-term, you can save a sizable sum of money by doing this.
2•Contribute to a Traditional IRA
Even if you already have a retirement savings account at work, such as a 401(k) or 457(b), you can still open and contribute to a traditional IRA. This type of account allows you to contribute after-tax dollars, which may not reduce your tax burden in the current year.
However, any growth your IRA realizes over time will grow tax-free. This means that whatever amount you have in the account when you retire will be yours to use and enjoy. As of 2020, you can contribute up to six thousands dollars to an IRA, or $7,000 if you’re over 50.
3•Consider a Health Savings Account
A Health Savings Account (HSA) is a tax-exempt option if your healthcare plan has a high deductible. Contributions to an HSA are deductible, and withdrawals aren’t taxed as long as they’re used for qualified medical expenses. You can contribute up to $3,550 to an HSA if you have individual coverage, and up to $7,100 if your high-deductible healthcare plan covers a family.
4•Invest in Education
Investing in your education, or your children’s education, can be a great way to reduce your tax burden. You can take advantage of tax credits and deductions for education expenses. For example, the American Opportunity Tax Credit allows you to claim up to $2,500 in tax credits per student for the first four years of college.
5•Itemize Your Deductions
When you file your taxes, you have the option to either take the standard deduction or itemize your deductions. Itemizing your deductions may allow you to reduce your taxable income significantly. Deductible expenses can include mortgage interest, state and local taxes, charitable donations, and medical expenses.
6•Start a Side Business
Significant tax advantages can result from starting a side business. You can deduct business costs from your income, including those for office supplies, business travel, and home offices. If you utilise a section of your house for work, you can potentially be qualified for a home office deduction.
7•Hire a Professional
The tax system might be difficult to understand, and hiring a professional can help you identify deductions and credits that you may have skipped. A tax professional can also help you plan your finances in a way that minimizes your tax liability.
Conclusion
Finally, there are a number of simple techniques to lessen your tax liability and keep more of your money in your pocket.