While it’s important for everyone to pay their fair share of taxes, doing more than that is unnecessary. Tax evasion is risky—not to mention illegal—but it’s not a crime to use tax reduction strategies. In this guide, we’ll share five legal tax reduction methods.
Invest in Real Estate in Distressed Areas
Individuals and businesses saw changes with the enactment of the Tax Cuts and Jobs Act. One notable change is the creation of a new tax incentive that makes it easier to invest in low-income areas. The goal is to create jobs and boost economic development by giving investors tax benefits. With this and other benefits of opportunity zones, there’s no better time to invest in real estate.
Make IRA Contributions
Putting money into a retirement account is one of the simplest ways to secure your financial future and decrease tax liabilities. Most workplaces offer retirement plans such as 403(b)s and 401(k)s, which often come with matching funds and high yearly contribution limits. Anyone who earns income (or who is married to a wage earner) can contribute to an IRA or another retirement plan. With these accounts, all contributions can be deducted from the current year’s taxes.
Use an FSA
Sometimes called a medical spending account, an FSA or flexible spending account helps employees avoid taxes on funds used for some childcare and medical expenses. Workers and employers are allowed to make tax-free FSA contributions if the funds are spent on approved expenses by the yearly deadline. FSA usage reduces taxes because contributions are excluded from one’s taxable income. Unfortunately, ineligible withdrawals carry steep penalties.
Claim Itemized Deductions
When a person files taxes, they can itemize deductions or claim the IRS’ standard deduction. Itemization on Schedule A only makes sense when total deductions are more than the standard. For the 2022 tax year, a single taxpayer’s standard deduction is $12,950, and for a married couple filing jointly, it’s $25,900. If you’ve made significant payments for property, local, or state taxes, itemized deductions may help save some money. They are subtracted from the AGI or adjusted gross income, thereby reducing tax liability.
Search for Credits
While there’s much to be said for tax deductions, credits are equally important. A tax credit increases your refund or reduces the amount of tax owed. For 2022, the EITC or Earned Income Tax Credit lets lower-income taxpayers claim up to $560 for themselves and almost $6000 for three children. College students can also get various tax credits.
Bonus Tip: Start a Business
Along with the creation of income, starting a business offers numerous opportunities to reduce or eliminate tax liability. Many expenses, including equipment, supplies, services, and marketing, can be deducted from a business owner’s income, reducing their tax burden.
Business owners can get more deductions if they work from an eligible home office. They’re allowed to deduct a percentage of utilities, insurance, rent or mortgage, and more, based on the size of the office in relation to the rest of the home.
Learn How to Reduce Taxes and Keep More of Your Hard-Earned Money
The only certainties in life are death and taxes, as the saying goes. While death is impossible to avoid, tax liabilities can be reduced in some cases. The sooner taxpayers use these strategies, the better off they’ll be when tax time rolls around.