Tax Planning: Strategies to Reduce Taxes

Tax planning is an analysis of your financial situation to help reduce tax liabilities and maximize tax breaks legally and efficiently. Avoiding taxes isn’t easy since tax rules can be quite complicated, but there are various strategies you can employ to minimize them. Below, you will find some tax planning strategies that can help you. Let’s begin.

Consider Tax-Advantaged Accounts

When tax planning, leveraging tax-advantaged accounts is one strategy you can consider. If your employer offers a 401k savings plan, then you can get a tax break for money saved for retirement. Additionally, if your employer offers an FSA (flexible spending account), you can use it to lower your tax bill. 

The IRS lets individuals send tax-free money from paycheck to FSA each year. However, there is a limit, and in 2024, this limit is $3,200. The IRS does not tax money removed from your paycheck and kept in a 401k. You can also explore individual retirement accounts like traditional and Roth IRAs. If you want to learn how to move 401k to Roth IRA, be sure to understand the rules and tax implications

A traditional IRA offers you the tax advantage of your contributions being tax-deductible. On the other hand, a Roth IRA tax advantage is that your retirement withdrawals aren’t taxed. You can seek guidance on the right tax-advantaged accounts by consulting with a tax professional at Moorestown Financial Services.

Consider Long-Term Capital Gains

Investments help grow wealth. In addition, investing in real estate, bonds, mutual funds, and stocks offers favorable long-term capital gains tax treatment. Investors who hold capital assets for more than a year enjoy a preferential tax rate of about 20% capital gain based on income level. 

When investors sell an asset, they only help for less than one year, and the capital gain is taxed at an ordinary income tax rate. A good understanding of short-term and long-term capital gain is crucial for growing wealth. 

Begin a Business

Aside from creating income, businesses offer various tax advantages. Various expenses are removed from income when used for daily business transactions, reducing tax obligations. Health insurance premiums are also deductible for self-employed people if they meet the requirements. 

In its guidelines, the Internal Revenue Service (IRS) allows business owners to remove a portion of their home expenses through home office deduction. However, taxpayers must conduct a business with the aim of making a profit to claim the deductions. To determine this, the IRS assesses various factors. A taxpayer who makes profits in three of five years of operations is assumed to be involved in a business for profit. 

Consider Investing In Municipal Bonds

The government requires money to cater to citizens, like maintaining public schools and good roadways. They can get some of this money by selling securities called municipal bonds. Now, here lies the advantage. 

When an individual holds a bond until it matures, you don’t need to pay a federal, state, or local income tax on the interest as a resident of the locality where the government issued the bond. The tax-free interest payments make municipal bonds very attractive to many investors. 

Endnote

Every individual must pay the legally owed tax to the government. However, you don’t need to pay extra. By searching for financial information on the IRS website or consulting with a financial services consultant, you can definitely take steps to save tax. It is important you ensure you qualify and meet every applicable rule, then enjoy your tax-saved money.