Top 4 Strategies to Protect Your Income From Taxes

There are three things inevitable in life, with death and taxes being among those. Taxes can ruin anyone’s day, especially if it’s among the unexpected ones. It’s your duty to pay them, but you don’t have to like them. A tax resolution can be helpful, but there are other strategies out there to protect your income.

Taxes can be difficult to avoid, and doing it wrong can have the IRS running after you for a long time. However, there are strategies to ward off the tax people. These 4 strategies may need you to go the extra mile, but they will help protect your income from taxes.

1. Invest On Your Retirement Accounts

If you are looking to consider tax planning, one of the major strategies you’ll find is contributing to a retirement account. There are several ways to do this, but the answer lies in your 401(k) and your IRA. Use your funds for investments, moving away from interest income and short-term capital gains.

Short-term capital gains and interest income are taxed like ordinary income. This can go for as much as 37%, depending on your existing tax bracket. So you need to sell off investments that will cost you a lot of money come tax season, from taxable bond funds, actively managed funds, dividend stock funds, and more.

Relocate your assets to funds that infrequently trade, which only requires long-term capital gains tax. These include index funds, municipal bond funds, and even buy-and-hold equity funds. This much can save you as much as 0.75 points a year – even more, depending on where you are.

Work with a tax planner to determine how to sell appreciated or depreciated securities to maximize losses. By performing tax-loss harvesting, you can offset a capital gains tax liability. If your capital losses exceed your capital gains, you can have them deducted from other income. You can also carry any excess losses forward to later years.

2. Give Money To Charity

Giving money to charity, specifically non-profit organizations has been a way for the rich to get tax deductions for the longest time. New tax laws allow for a higher deduction now, with the rate going for as high as 60 percent. If you’re already donating to charity, this should be an excellent way for you to get some consistent tax deductions.

If you have some extra funds, another way to deduct from your taxes through charity is the use of a conservation easement. This process involves donating a plot of land to a land trust or a government agency. If it can be proven that you have a way to protect important conservation resources, it can qualify as a charitable tax deduction.

To get a deduction on your charitable contributions, you need to have your taxes itemized. Standard deductions go for as much as $12,000 for individuals, with as much as $24,000 for married couples. But, of course, you want to have the deductions exceed those amounts, so itemizing should give you a better chance at getting more.

3. Start Your Own Business

A side business is one of the best ways to get better tax advantages for yourself. If you declare yourself self-employed through a full-time business or a side hustle, you can expect several tax benefits that will help cut down your tax rate. This comes in addition to the income that you will get from your side business.

Depending on how you do your daily business, you can cut a ton of your business expenses from your income. In addition, putting details such as health insurance premiums can help reduce your total tax obligations to the government. There are several special requirements that you have to meet, but the entire process should be straightforward.

A business owner can also deduct several home expenses through home office deduction – primarily within reason and with the guidelines of the IRS. To get specific deductions, you would need to conduct business and make a profit doing it. If you’ve been doing business for the last five years, you need to realize a profit for three years to be listed as “engaged in profit.”

Maintain proper records of all your side hustle. Whether you’re freelancing or doing side gigs, you need to know things you can deduct. This can be anything from business utilities, business-related travel, healthcare insurance, advertising, and much more.

4. Contribute To Your Health Savings Account (HSA)

If you’re an employee with a high-deductible health insurance plan, you can deduct it from your taxes through a health savings account (HSA). Much like with a 401(k), your HSA contributions can be matched up by your employer, and these count as payroll deductions – which are exempt from your taxable income.

A health savings account is something that you can pull from when you have medical expenses that you need to pay. All withdrawals are tax-free as long as you use them for qualified medical expenses. Your direct contributions are 100% tax-deductible, with several levels depending on your current status.

Maximum deductibles change every year, with the current maximum deductible contribution levels at $3600 for individuals. Families can have as much as $7200 without needing to pay for tax on the earnings. You can use your HSA funds to pay for copays, coinsurance, and your other deductibles.

You can also use your HSA funds towards your retirement savings. By the age of 65, you can also use the contents of your health savings account without any penalty or taxes on any of it. In the same vein, you should also remember to use your HSA only on eligible expenses; otherwise, you can expect some penalties and taxes to be paid.

The Bottom Line

It is essential to pay all your legal responsibilities for your taxes. Anything you legally owe should be paid for, but that doesn’t mean there is no way for you to deduct your taxes. Whether it’s with your HSA or starting your own business, there are many ways to reduce what you owe legally.

Follow these tax strategies we have for you and get yourself ready for tax season. Going the extra mile can help save you money down the line. Get the timing right, and you should be saving a good percent of your income.