Top 5 Strategies to Protect Your Income From Taxes
There are many ways the government will impose taxes on your earned income. For example, they will tax you at the state level, social security, Medicare, etc. It is not easy to avoid taxes, and therefore you need some strategies to warm them off successfully. Here are the top five strategies that you can use to protect your income from taxes.
Invest in Municipal Bonds
You may not know, but municipal bonds do not have any federal, state, and local level. So, this is a great way to protect your income from high taxes. Remember, it still depends on your location.
Investors are attracted to municipal bonds because they offer tax-free interest payments. If you invest in them, you will pay lower interest rates. We recommend you to understand the tax-equivalent yield, which means the higher your tax bracket, the greater your tax-equivalent yield.
Go for Long-Term Capital Gains
If you want to grow your wealth, then there is no better option than making investments. You can invest in mutual funds, bonds, stocks, and real estate, which are some of the best ways to when it comes to reducing taxes for your long-term capital gains.
For example, if you hold an asset for more than one year, you will enjoy a preferential tax rate, which could be zero percent, 15 percent, or 20 percent on your capital gains. Again, this largely depends on your income level.
If you hold an asset for less than 12 months before selling, then you will be taxed at ordinary income rates. So, it is essential to understand the difference between short-term and long-term capital gains.
Start a Business
Starting a business offers a wide range of tax benefits. When you use your money in the business, you can reduce the obligation of the total tax, especially tax deductions like health insurance premiums.
It is important to follow the guidelines of "Internal Revenue Service" because it allows you to deduct some of your home expenses with office deduction. The portion of the internet or utilities used in your business may also be deducted from your income.
Open a health savings account
If you are an employee with a high-deductible health plan, then you can open health savings account to reduce taxes significantly. For example, with a 401(k) plan, you can contribute money to your health savings account before taxes.
In 2020, the maximum contribution is $3,500 for a single persona and $7,100 for a family. Your money grows without any tax-paying requirements on the earnings. An additional tax advantage of a health savings account is that you can use it to pay for qualified medical expenses with taxing withdrawals.
Get IRS credits
You can get IRS tax credits to reduce taxes. One such option is the earned income tax credit. For example, if you are a low-income taxpayer and have no children, you can receive up to $500 in credits.
If you have three or more children, you can get up to $6,660 in credits. On the other hand, if you are a student, then you can get a maximum of $2,000 per year with the American Opportunity Tax Credit.
|Thomas Moore is a proud American with a Bachelors Degree in Business Administration from the University of San Diego. He has been in the financial industry for many years holding numerous licenses in multiple states. He currently helps operate cashkingco.com and is our resident expert on all things finance and a great writer. LinkedIn Profile|