I was paying wasn't that much and I had other things on my mind besides looking for ways to minimize my tax burden however this lock a days ago a way of managing my taxes soon changed as it began to build up my income after getting a few raises at work starting a couple online businesses and working a side hustle my income soon shot up to the point where the amount of tax I was paying started to bother mecoinci dentally during this time.
I came across one of Grant card ones where he explained that one of the main factors that attributed to him moving from California to Florida was to reduce his tax burden you see Florida has no state tax meaning that the millions of dollars he was earning every year will be subjected to much less tax while I was not trying to shelter as much money from taxes as him the principal's still resonated with me that if you want to build your wealth quicker you need to reduce the cost that can get in the way and tax was certainly one of them
Tax System Is Progressive:
Therefore I researched numerous the tax system is progressive this means that as you earn more income you are subjected to more tax on the contrary when you make less money you will owe less taxes to the government and luckily there are ways to both make a good income and lower how much of that income tax we applied to otherwise known as your taxable income one of the most commonly used methods of reducing your taxable income is by contributing to retirement accounts such as a tax deferred 401 k plan now this doesn't mean you avoid paying taxes on these earnings altogether but it does mean that for the current year whatever amount you contribute to this account will reduce how much money is subjected to tax this money gets taxed too later when you with draw it from your retirement account but by doing.
This it can save you a ton of money and here's how you see if you were in the middle of your career and are being taxed at 40% then you would be giving away $40,000 on a $100,000 income however during retirement your income will be less say $50,000 and so your income tax rate would instead be 25% as an example this means that you would be paying just $12,500 in taxes instead on money that you avoided paying a much higher tax rate on by deferring it in your 401k that means you'll get a tax break now and you'll be feeding your growing nest egg and setting yourself up for a comfortable retirement which leads us to our next tip number two contribute to a traditional IRA even if you already have a retirement savings account at work like a 401 K or 457 B you can still open and contribute to a traditional IRAor individual retirement account you just need to have earned taxable income and have not yet reached the age of 70 and a half for those who are unfamiliar with a traditional IRA.
How It Works:
Let me briefly explain what it is and how it works a traditional IRA is another retirement savings vehicle but unlike a 401 K you are contributing after-tax dollars to the account now you may be wondering how that helps you pay less tax if you're using after-tax funds and while it doesn't reduce your tax burden in the current year.
it can significantly payoff down the road you see any growth that your IRA realizes over time will grow tax-free meaning that whatever amount you have in this account when you retire will be yours to use and enjoy as of 2020 you can contribute up to $6,000 to an IRA or $7,000 if you're over the age of 50 this is important to note because any excess contribute to your IRA beyond these limits will be taxed at 6% meaning that those returns you are realizing may be diminished or totally nullified.
If you were to over contribute number three consider a health savings account well IRAs are widely available and applicable to almost everyone quite a few other investment accounts can get you the same kind of tax break and a health savings account or HSA is one ofthem an HSA is a tax exempt option if your healthcare plan has a high deductible not only are your contributions deductible but withdrawals aren't taxed as long as they're used for qualified medical expenses as of 2020 you can contribute up to three thousand five hundred and fifty dollars to an HSA.
If you have individual coverage and up to seven thousand one hundred dollars if your high deductible healthcare plan covers a family and you don't have to spend it all either you can leave funds in your HSA indefinitely since they're not subject to required minimum distributions and from a practicality perspective.
This makes sense you are more prone to using these contributions in your later years so you may as well contribute now and not only get a tax break but also have money set aside to deal with life's unfortunate circumstances number four invest in education if you've got kids or plan to have some in the future the thought of having to fund your children's education as probably crossed your mind according to US News and World Report average costs range from nine thousand seven hundred and sixteen dollars to thirty five thousand six hundred and seventy six dollars for a single year of education.
So it's important to get ahead of that bill now and this is where a 529 plan comes in handy a 529 plan is an investment vehicle specifically built for educational savings you can use it to pay for your kids college tuition or even to send yourself or your spouse to school the exact tax benefits vary by state and the contributions aren't deductible on your federal return for more than 30 States offer full or partial tax deduction or credits on 529 contributions and the funds are allowed to grow tax-free they won't be tax on withdrawal.
Either so long as they're used for qualified educational expenses certain expenses that qualify for the 529 plan include college tuition fees books and computers and in some cases it'll cover room and board you can also take out up to ten thousand dollars pery ear to pay for tuition at private or religious K through 12 schools but if you try to take out the money to pay for non school related expenses you'll be subject to regular income tax on the withdrawal as well as an additional ten percent and it can be a great way to lower your overall tax liability if you itemize your deductions itemizing your deductions does take time however and not everyone has enough deduction to supersede the standard deduction which is a fairly hefty twelve thousand four hundred dollars for single filers and twenty four thousand eight hundred for joint filers than twenty twenty another thing to note is that if you are making charitable donations make sure to keep receipts of the transaction this documentation will ensure that you candef end your deductions.
If you are audited and the last thing you want to do is be penalized for all your charitable efforts number six educate yourself generally in life the more you know the better and it's no different when tax issues when you finally submit your return now I am sure you know that some expenses can be deducted for tax purposes but it's good to know which ones exactly here is a short summary of the most common deductions and a criteria that need to be met in order to claim the first or major medical bills.
If you spend more than ten percent of your adjusted gross income on qualified medical expenses you may be able to write them off if you itemize your deductions second there is student loan interest people with student debt interest can deduct up to twenty-five hundred dollars depending on their income level this is an above the lined eduction which means you can take it even if you opt penalty-free withdrawals from that IRAwe were talking about earlier next are charitable donations these have a tax-deductible status as I've previously mentioned in this you have business-related deductions if you're a freelancer or you work from home.
Business-related deductions:
You should also look into business-related deductions like the cost of your home office space you might also be able to deduct certain supplies travel expenses and even meals and entertainment number 7 capitalize on tax credits in certain scenarios the IRS extends credits to eligible taxpayers for instance those pursuing continued education or returning to school for instance there are the American Opportunity or Lifetime Learning credits depending on your enrollment status adjusted gross income and how you've paid for educational expenses you may be entitled to the American Opportunity or Lifetime Learning credits next there is the Earned Income Tax Credit if you're not in the top ranks of income earners then you might be eligible for the Earned Income Tax Credit a benefit the IRS extends to low to moderate earners the cool thing about tax credits is that they don't just reduce the amount you pay in income taxes rather they count as an actual reduction in your total tax bill if the tax credit is refundable you'll get a refund.
If your tax credits exceed what you owe for instance if you would have owed $500 then claim a thousand dollars in tax credits not only will your payment be waived you'll also receive a farm a two dollar return speaking of returns what should you do if you're in a return position after employing these tax reduction strategies into my own life year over year I started to receive tax refunds and had to decide how to use this large chunk of cash what.
I typically advise others to do when they receive any windfall is to invest it wisely this could mean literally investing it into a retirement account buying stocks using it to fund a down payment towards a rental property or using it to take courses that will further increase your income generation potential ultimately as long as you don't go spend your return on useless items then you will not only have saved yourself cash but will have invested into your future rich lifestyle thanks for visiting if you want to go from the life you have you deserve.
