9 Legal Secrets to Reduce Your Taxes
While paying taxes is, as a rule, unavoidable, the amount a person pays in taxes can be reduced if certain strategies are used. Since every taxpayer has a different financial situation, not all ways to reduce taxes will work for everyone, but most do. While some tax avoidance secrets can be used at any time, it’s always a good idea to plan now rather than waiting. Here are nine secrets taxpayers can use to minimize their tax liabilities.
1. Fund your retirement.
One of the best ways to reduce your taxable income is by investing in your own future. If you’re not already doing so, start contributing to a retirement plan. In many cases, employers match contributions, but even if they don’t, you’ll be surprised how fast a retirement account grows. If you’re not sure which retirement plan option is best for your needs, take the time to discuss the issue with a qualified financial planner.
2. Purchase deductible items.
In the past couple of years, countless employees found themselves working from home. While setting up a home office isn’t cheap, the money spent on furnishings and equipment is generally deductible. If you are working from home, explore how investing in home office equipment and furnishings can reduce your taxes and, at the same time, enhance your comfort level during working hours.
3. Start a new business.
If your job disappeared, now might be the time to consider opening a new business. New businesses enjoy numerous tax benefits, which means your overall tax liability will be reduced if you choose to start a new business. However, even if you’re still employed elsewhere, consider a side hustle that will provide extra income and also reduce your taxes if you play your cards right. If your finances are suffering, there are ways to overcome financial hardships, become self-employed, and improve your life.
4. Take advantage of a health savings account.
Most people have medical expenses during the year, and it seems insurance never covers the entire bill. That’s where health savings accounts come into play. The accounts are designed to take untaxed income and use it for medical expenses. No one likes having medical bills to pay, but being able to pay those bills with untaxed income reduces the pain a little.
5. Don’t overlook tax credits.
No one wants to pay more taxes than they need to, but many taxpayers miss important tax credits that would reduce their payments. For example, roughly five million taxpayers fail to claim the earned income tax credit every year. That means the government keeps about $7 billion dollars that taxpayers are entitled to receive. Exploring all the tax credits you may be entitled to when preparing your taxes simply makes good financial sense. If you’re unsure how to proceed, let a tax professional prepare your taxes to ensure you take advantage of every tax deduction and credit you’re eligible to receive.
6. Use the home office deduction.
For years, the IRS has questioned taxpayers about their home office deductions, but that doesn’t mean anyone who’s entitled to the deduction should avoid taking advantage of it. This deduction is especially important now, as countless individuals are working from home and giving up valuable living space to accommodate their home office. If you’re working from home, don’t ignore this deduction even if you may be forced to produce proof of the expenses involved later.
7. Give back to the community.
One commonly overlooked strategy to reduce taxes is to give back to the community. Charitable donations are still a dependable way to minimize your tax exposure, so explore ways to donate money that make sense for your financial objectives. And, don’t forget that some expenses related to volunteering may also be deductible. If you’re unsure which expenses related to volunteering qualify as deductions, consult a tax expert for assistance.
8. Rent your home for business meetings.
While this deduction hasn’t been used a lot in the past, the pandemic opened the door for more people to do so. Known as the Augusta exemption, the rule states homeowners can rent space in their homes for up to 14 days without having to report the income. That can be quite a break, as that income could benefit just about anyone’s financial picture. Again, all the applicable stipulations must be met, but the opportunity is certainly worth exploring.
9. Keep track of your business travel expenses.
Most taxpayers understand they can deduct some, if not all, business travel expenses. The rules are pretty straightforward when calculating most expenses related to routine business trips. However, many people are not aware they could deduct certain expenses when they combine a business trip with a vacation. For example, taxpayers could deduct a part of their airfare and lodging expenses when combining business with pleasure. To avoid making costly mistakes, discuss your plans with a tax preparer prior to taking a trip if you plan to deduct business expenses while on vacation.
Start Planning for Next Year Now
Tax experts always recommend planning now to enjoy the benefits of deductions and credits when filing next year. Careful preparation makes it easier to use all the benefits listed here, and some taxpayers will certainly qualify for other tax reduction strategies as well. The first step is to find a tax professional who can review your current situation and develop a plan for the coming months.
In some instances, investing in a new business is a solid way to improve your life and, at the same time, minimize your tax obligations. However, even risk-averse individuals can find numerous ways to reduce their tax burden during the coming year. While the pandemic hasn’t benefited a lot of people, others are finding ways to use the tax code to their advantage while working from home or in a hybrid situation. You can too!
Remember that there will be times when making an investment in your future now will pay off handsomely in the future. For information on additional ways to reduce your taxes legally, contact a tax professional.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.