Posted by Income Taxes and Bookkeeping LLC

Individuals' Tax Filing Strategies

Individuals' Tax Filing Strategies

The rate at which earnings are taxed can be overwhelming at times, but it cannot be avoided. However, there are a couple of ways you could cut down on the amount you get to pay on your tax returns.


  1. Municipal Bond investments.

Investing in municipal bonds is synonymous with lending to the state or local government for a specific period with significant milestones for interest payment. When the bond has reached maturity, the initial amount invested in the bond is paid back to the investor. 

What makes municipal bonds attractive is that the interest obtained from them are free from federal taxes, as well as state and local taxes, though, for the latter, it would depend on your area of residence. However, because of the tax-free benefits,  the interest rate is significantly lower than other corporate bonds.



  1. Get long-term gains on your capital investment.

Usually, when you invest in stocks, real estate, mutual funds and the likes, and you hold it for longer than a year, you get special tax rates on your investment returns for up to 0%, 15% or 20%, depending on the investor's income bracket. Investments not held for up to a year are taxed at the standard rates. Therefore, if you want to pay less taxes and get greater returns on investment, you might want to consider investing long term.



  1. Start a business.

This is one way to cut back on the amount you get to pay on taxes. The reason is that you get to deduct the money used to run the business, including daily expenditure, from your taxable income. Also, there is a way for self-employed individuals to add their home utility bills to their home office expenditure, which could be deducted from your overall tax bill and your health insurance premiums. You follow the IRS guidelines on the subject. You meet the specified requirement, one of which is that your business has to make a profit.

A business that makes a profit based on IRS rules has been in profit for at least three out of the last five years.

 


  1. Maximize the use of retirement accounts and employer benefits.

In the past year and currently, contributions on retirement plans can get an increased tax benefit for payments of up to $19,500 on plans such as the 403(b) or 401(k).

To better illustrate, if an individual earns $70,000 annually and contributes $19,500 towards a retirement plan, they reduce their taxable income to $50,500. Also, individuals who are fifty years old and older can add an extra $6,500 to their workplace retirement plan contributions. Those without an initial retirement plan can sign up for the IRA and make up to $6,000 (or $7,000) if they are above fifty years of age. Also, those with a workplace retirement plan can make IRA contributions and have these contributions further deducted from their overall taxable income.



  1. Open a Health Savings Account 

If you have a health insurance plan with high tax benefits, it will be wise to open a health savings account to reduce the amount you get to pay on taxes. Just like contributing to retirement plans, a health savings account, especially when matched by the employer through payroll deductions, might be added to the list of deductibles from the individual’s total taxable income. Every payment made to your health savings account is 100% tax-free.

The limit on contributions to a health saving account for an individual is $3,600, while for families, it is $7,200. This is for the year 2021.

For 2022 however, the stipulated limit is $3,650 for individuals and $7,300 for families. These savings accounts can grow over time, tax-free, and if they are needed to foot medical bills, withdrawals will also be tax-free. 


To sum up

While it is not good to default on your taxes, it is not necessary to pay more when you can pay less. Therefore, in filing for your tax returns, you can use any of the above-listed strategies to reduce the amount you get to pay on taxes.


FOR MORE INFORMATION ON HOW INCOME TAXES & BOOKKEEPING, LLC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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