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Too many Americans overpay their taxes without knowing it. In this article, we take a look at simple tips, opportunities you can take advantage of to cut down on your taxes legally.
Let’s dive in
Here’s one thing you must know – paying taxes is inevitable. You have to get it out of the way and clean your financial records. Although it is established that paying your taxes is your civic duty, it is still perfectly legal to seek out strategies to help you save on them. There are a lot of obscure areas that result in people paying extra dollars than is necessary to the IRS.
To understand how to save money on taxes, it is necessary to pay attention to the current tax regulations and any policy changes that are in place. Then, with the help of a professional, you would be able to better organize your tax filing in time for any tax season.
You should note that your income is taxable at the federal, state, and local levels. This means that it is possible to make errors in paying extra if you do not use an expert.
However, with these strategies, you would be able to save or recoup some precious dollars on taxes.
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Check for loopholes in your investment portfolio
Investing in mutual funds, stocks, or municipal bonds can help you save some money on taxes if you know where to look. For instance, the interests on your municipal bonds are exempt from federal taxes. It may be the same at your state and local levels.
As an investor, you must keep an eye on the performance of your investments all through the year. This way, you know which securities to sell off at the end of the year to offset the capital gains and reduce your taxes.
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Aim for a long-term capital gains
Another way to save money on taxes is by holding your capital assets for the long term. This usually means more than one year to enjoy a reduced tax rate. If you hold a capital asset for less than a year, it gets taxed at the regular income tax rate, ranging from 0%, 15%, or 20%, depending on your tax bracket. Aiming for long-term capital gains is usually the best for real estate investments.
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Adjust your W-4 form
If you are an employee, your W-4 form tells your employer how much tax to withhold from your income in every paycheck for remittance to the IRS. However, many people do not bother with their W-4 since employers usually handle it.
However, suppose you received a heavy tax bill in the past tax year and want to avoid that in the next tax year, you can adjust your W-4 to increase your withholdings so as not to owe as much in the next filing period.
On the other hand, you can reduce your withholding if you received a generous refund in the last tax year. But, again, a tax expert will be in the best position to advise you on saving money on taxes using the W-4 form.
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Look out for tax deductions and tax credits
Tax deductions are possible under certain conditions, while tax credits help you clear off some of your tax burdens. Individuals might overlook these minor benefits, but some hidden deductions and credits apply to different categories and taxpayers.
Contributing to charitable causes or pre-tax retirement accounts results in tax deductions. Also, the Earned Income Tax is an IRS-approved tax credit that can benefit low-income taxpayers.
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Contribute to your retirement accounts – an IRA or 401(k)
You are left with less taxable income by saving towards retirement, which means less tax to pay. There are individually-managed retirement accounts, and there are also employer-sponsored retirement accounts.
By signing up for a 401(k), you would have a percentage of your paycheck paid directly into an investment account via listed investment options such as mutual funds.
The government does not tax the funds you directly divert into a 401(k). On the other hand, an IRA contribution is made after tax has been deducted from the income. Since it is already taxed, you wouldn’t have to pay any more taxes upon its withdrawal. However, there are more clauses to consider to save money off taxes in this way.
Use tax-saving strategies that cater to your particular financial situation
Conclusively, it is highly advisable to thoroughly consult a tax professional to examine your financial records. This is because taxpayers fall under different tax brackets, and each person’s financial situation, investments, and plans.
With the constant policy adjustments made by the IRS and the government, there are increasing options available to taxpayers to help them reduce their tax burden and save some extra money on taxes.
Headed by Shauna A. Wekherlien (CPA, Masters in Taxation, and Certified Tax Coach), Tax Goddess is a tax and accounting firm that specializes in tax reduction, audit assistance, and accounting services. As a top 1% CPA in the US, what sets us apart from other CPAs is our cutting-edge system in which our team of professionals, we are a team of experienced tax professionals who will work with you to develop a customized plan to reduce your taxes while creating the most-effective financial plan possible.
Over the past twenty years, we have helped individuals and business owners from across the US keep more of their hard-earned income by saving a total of $423,984,402 and counting.
You can book a free consultation here to discuss all tax-related queries and get expert advice from our tax professional. Book here
Also, our YouTube channel is a goldmine for tax updates and tax reduction strategies. Watch clients’ success stories here.
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