For many people, taxes are a major expense that they have to pay each year. Whether you need to manually send in the money each quarter, or it is automatically deducted from your normal paycheck, you will want to do everything you can to legally minimize what you owe. These tips and techniques will help you to avoid paying unnecessary taxes.
Reduce Your Taxable Income
You generally have to pay taxes on all the money you earn, but there are some exceptions to this rule. If you spend your money on certain things, for example, that amount won’t be counted when calculating your taxable income. The following are some popular examples:
• Charitable Giving – You can get a tax break from donating money, vehicles, or almost anything else to approved charities.
• Health Savings – If you have access to a health savings account (HSA), any money that you put into it will be pre-tax. This money can then be spent on any medical, dental, or other health related expenses.
• ROTH IRAs – Contributing to a ROTH IRA is a great way to reduce your future taxes. Any money you earn in your IRA won’t be taxed!
• Municipal Bonds – Buying municipal bonds is a good way to earn tax-free interest.
• Home Ownership – Any interest you pay on your mortgage can be deducted from your taxes.
• Most Retirement Plans – You can put money in your 401(k), traditional IRA, or many other types of retirement accounts on a pre-tax basis to save money today. Just remember, however, that you’ll have to pay taxes when the money is withdrawn.
Capital Gains & Losses
Most items that you own are considered capital assets by the IRS. When you sell these items, the difference in the amount you paid for them and the amount you sold them for is called the capital gain or capital loss. In most situations, a capital gain is going to be taxed. You can, however, offset capital gains with capital losses to help minimize the amount you have to pay in taxes. This is why it is sometimes smart to sell stocks at a loss, for example, and then buy them again down the road.
Coverdell Savings Accounts
A Coverdell Education Savings Account, or ESA for short, is a special option that allows you to save money for your children or other loved one’s future education expenses. The contributions will grow tax-free, and can be used by your loved one to pay for college expenses, books, and much more. This is a great way to help your loved ones continue their education while minimizing the overall tax burden.
Retirement contributions to accounts such as IRAs, ROTH IRAs, 401(k)’s, and many others are an important way to ensure you can safely retire later in life. There are thousands of pages worth of laws on the books regarding retirement accounts, which can make it hard to determine the best way to invest. Talking with an accountant or other financial advisor will help you to make the best choices to ensure you have what you need during retirement, while legally minimizing your total amount of taxes paid.