Nobody really likes taxes; whether it’s filing, paying, or hearing about an increase in them. After all, we’ve worked hard the whole year. Seeing a large chunk of our earnings drained by taxes is simply painful. However, taxes are just a part of life. Can You Avoid Tax?
Well, what if they didn’t have to be such a major part of our income? We’re not talking about anything illegal like tax evasion, but something perfectly legal: tax avoidance.
That’s right; you can rescue or avoid several taxes on income with a few changes or steps. Let’s discuss these now on how can you avoid tax:
- Invest for Long-Term Capital Gains
If you want to grow your wealth, the most solid way is to invest in something. If you invest in mutual funds, stocks, or real estate, you may expect some tax benefits in exchange for investing in these long-term capital gains.
For instance, an investor owning capital assets for more than a year will get preferential tax rates of 20, 12, or even 0 percent on their capital gain. The exact rate will depend on your income level.
If you hold the asset for under a year, the tax on your capital gain will be at the regular income rates. Once you understand this difference, the way to expand wealth and tax resolution will be clearer.
- Invest in a New Business
A side business will make more income for you and also offer several tax advantages. When you file expenses that are incurred during your business operations, you can deduct them from your income. This practice will reduce your total tax payments.
Self-employed folks can also focus on tax deductions. Of course, they have to meet certain requirements first.
If you follow IRS guidelines properly and become a business owner, you might even be able to deduct some of your home expenses using the home office deduction. One of the conditions here is that your business has to realize a profit for a certain number of years.
- Max Out Some Accounts
Many jobs have employee benefits and retirement accounts such as a 401(k) or a 403(b) plan. Shortly, your taxable income might go down after contributions up to a significant amount. People 50 years of age or older may add up to $6,500 to their workplace retirement plan.
What happens if your work doesn’t offer a retirement plan? You can still get tax breaks with contributions of up to 6 or 7 thousand dollars to IRAs, which are regular individual retirement accounts.
Even if you have a workplace retirement plan or your spouse does, you can have an IRA. Again, the amount of deductible tax depends on your income level.
- Open an HSA
A Health Savings Account (HAS) is useful for employees who have a high-deductible plan for health insurance. They can utilize their HSA for reducing taxes even further. For someone with a 401(k), the contributions to HSA might even get the usual match from their employer. These will not be part of the taxable income.
An individual who directly contributes to their HSA will find that these additions are completely tax-deductible. In the coming years, one may expect the maximum contribution level for tax deductions to rise. Plus, when you use your HSA to pay taxes on certain medical expenses, the withdrawals are not subject to tax either.
Your income tax isn’t the end of it; you have taxes to pay at the local, state, and federal level. It can be difficult to avoid all your taxes but certain strategies can help to reduce or diminish them. The above ways could come in handy. So, do consider them before the next tax season arrives! You just might have more income to save than you realize on reading can you avoid tax.