Protecting Your Income From Taxes Using These Methods
Jul 27, 2022 By Triston Martin

Earned income is subject to federal, state, and municipal taxes, as well as other levies to help pay for programs like Social Security and Medicare, to mention just a few. It is impossible to avoid taxes, but there are several ways to minimize the impact. Here are strategies to avoid paying taxes on your income.

Start with Municipal Bonds

Paying interest on the money you lend to the state or local government is the same as borrowing money from someone else. The initial investment is returned in full to the buyer when the bond reaches its maturity date. Investors are drawn to municipal bonds because of the tax-free nature of the interest they receive. Historically, municipal debts have defaulted at a lower rate than corporate obligations.

Pursue Long-Term Capital Gains

Investing is a great way to go about it when it comes to building money. Long-term capital gains tax treatment is another advantage of stock, mutual fund, bond, and real estate investing. If an investor holds on to a capital asset for more than one year, they are eligible for lower capital gains tax rates ranging from 0% to 15% to 20%.

The capital gain is taxed at regular income rates if the asset is sold after less than a year of ownership. Long-term vs. short-term capital gains rates are crucial to achieving financial freedom. 3 The tax rate on long-term capital gains for married couples filing jointly in 2021 is zero percent if the couple's taxable income falls below $80,800 and for a single individual, below $40,400.

Start Your Own Business

A siding company not only brings in extra cash but also has several tax benefits. Many costs can be deducted from income when spent on everyday business, lowering the overall tax requirement. Health insurance premiums are among the essential tax deductions for self-employed persons since they can be deducted if certain conditions are satisfied.

A company owner can also deduct some of their home costs using the home office deduction if they adhere to tight IRS criteria. The part of the business's utility and internet costs deducted from the company's taxable revenue is also possible.

Max out retirement and benefits

Contributions to a 401(k) or 403(b) plan up to $20,500 will lower taxable income in 2022. The standard employer retirement plan contribution can be increased by $6,500 for those 50 and older. Taxable income for an employee who pays $19,500 to a 401(k) in 2021 is reduced to $80,500. A tax benefit of up to $6,000 is available to those who do not have a retirement plan at work in 2022 and 2021 by contributing to a typical individual retirement account (IRA).

Utilize an HSA (HSA)

Health savings accounts (HSAs) can lower taxes for employees with high-deductible health insurance plans. HSA payroll deduction payments are excluded from the employee's taxable income, just as they are for traditional 401(k) plans. However, donations made directly to an HSA by an individual are fully deductible from their income. Individuals can deduct $3,600 from their taxable income in 2020, and families can deduct $7,200.

What Are the Most Effective Ways to Reduce Your Taxable Earnings?

Individuals and company owners worry greatly about tax savings while making financial plans. Many people could save money on taxes because of the TCJA's enhanced basic deductions even though the TCJA did eliminate many other itemized deductions and the personal exemption.

Retirement Savings

Making the most of your retirement funds is a simple approach to lowering your taxable income. The following are two of the most frequent retirement savings accounts that can assist in lower taxable income for the year in which a contribution is made.

Employee Benefits Plan

Pre-tax contributions can be made up to $19,500 in 2021 and $20,500 in 2022 for those who work for an employer that offers a 401(k) or 403(b). In 2021 and 2022, those over the age of 50 will be able to contribute an additional $6,500 in catch-up payments. Employee-sponsored retirement accounts reduce taxable income since contributions are made pre-tax through payroll deferrals.

An Individual Retirement Plan (IRA)

Individual retirement accounts (IRAs) are another way to save for the future (IRA). This year's maximum contribution to an Individual Retirement Account (IRA) is $6,000, with a $1,000 catch-up provision for individuals 50 and older. It is possible to deduct traditional IRA contributions from a taxpayer's taxable income, decreasing their tax bill for the year they were made.

Consider Flexible Spending Accounts.

Medical costs, for example, may qualify for pre-tax savings under flexible spending plans offered by some companies. It is possible to lower taxable income by putting away a part of wages in a separate account maintained by an employer through an FSA. Participants in a use-or-lose plan frequently have to spend all qualifying costs before the plan year or lose any money that hasn't been used up by the end of it.