Taxes are an inevitable part of life, but the savvy know that there are legal strategies to reduce the annual bill. From contributions to retirement accounts to making energy-efficient updates, here’s a comprehensive guide to help you keep more of your hard-earned money.
1. Contribute to a Retirement Account:
One of the easiest ways to save on taxes is by contributing to a retirement account. Whether it’s a traditional 401(k) or IRA or a Roth account, these contributions can be deducted from taxable income, offering both short and long-term tax benefits.
2. Open a Health Savings Account (HSA):
For those with high-deductible medical plans, contributing to an HSA provides an immediate tax deduction. The funds grow tax-deferred and can be withdrawn tax-free for qualified medical expenses.
3. Check for Flexible Spending Accounts (FSAs) at Work:
Employers offering FSAs allow you to pay for medical expenses with pre-tax dollars. It’s a valuable benefit for both health care and dependent care expenses, offering tax savings within set limits.
4. Use Your Side Hustle to Claim Business Deductions:
Self-employed individuals can leverage numerous tax deductions by starting side gigs. Business-related expenses such as vehicle mileage, advertising, and office supplies can significantly reduce taxable income.
5. Claim a Home Office Deduction:
For those with a home-based business, the home office deduction is a valuable tool. Ensuring the space is used exclusively for business purposes allows for deductions on rent and utility fees.
6. Opportunity Zones:
Opportunity Zones, established by the Tax Cuts and Jobs Act of 2017, are a federal initiative encouraging economic development in low-income areas. Investors receive federal tax reductions when they invest unrealized capital gains in specialized Opportunity Funds, which, in turn, invest in designated Opportunity Zones—chosen low-income community census tracts. This innovative approach aligns financial incentives with community development, fostering positive change and economic revitalization.
7. Write Off Business Travel Expenses, Even While on Vacation:
Combining business trips with vacations can lead to deductions on a portion of expenses like airfare and hotel bills. Careful record-keeping and adherence to IRS guidelines are crucial.
8. Accelerate Depreciation for Business Purchases:
Businesses can deduct 100% of the cost for certain purchases in the year they are made. This bonus depreciation is a valuable option for businesses making significant investments in assets.
9. Move Some Business Compensation from Wages to Distributions:
Owners of pass-through entities can optimize taxes by balancing income between wages and owner distributions. It’s essential to find the right mix while adhering to IRS requirements.
10. Deduct Half of Your Self-Employment Taxes:
Self-employed individuals can deduct 50% of the Federal Insurance Contributions Act (FICA) tax they pay, helping to offset the entire cost of this tax.
11. Get a Credit for Higher Education:
Government tax credits like the American Opportunity Tax Credit and the Lifetime Learning Credit offer significant relief for higher education expenses.
12. Contribute to a 529 Plan:
Parents can plan for their children’s education by contributing to a 529 plan. While federal tax breaks are limited, some states offer deductions on state income taxes.
13. See if You Qualify for an Earned Income Tax Credit:
Even if not required to pay federal income taxes, individuals may qualify for the Earned Income Tax Credit, offering a refundable credit of up to $7,430.
14. Itemize State Sales Tax:
Taxpayers who itemize deductions can choose between state income tax or state sales tax. This is particularly useful for those residing in states without income taxes.
15. Make Charitable Donations:
Charitable contributions remain deductible, and creating a donor-advised fund can allow bundling donations for more significant tax benefits.
16. Donate Your Required Minimum Distribution:
Retirees can donate required minimum distributions directly to charities, avoiding taxes on this income.
17. Adjust Your Basis for Capital Gains Tax:
Investors can enhance their cost basis by including all reinvested dividends, reducing capital gains when selling assets.
18. Avoid Capital Gains Tax by Donating Stock:
Donating appreciated stock to charities not only supports causes but also helps avoid capital gains tax.
19. Claim Deductions for Military Members:
Military reserves and active-duty service members can claim deductions for unreimbursed travel expenses and moving costs.
20. Make Energy-Efficient Updates:
Homeowners can claim federal tax credits for energy-efficient upgrades, ranging from insulation to solar panels.
21. Write Off Your Gambling Losses:
Gamblers can offset their winnings by deducting documented losses.
22. Don’t Forget State and Local Tax Breaks:
Check for miscellaneous deductions at the state level and explore options for reducing state and local tax burdens.
23. Make Energy-Efficient Updates:
The Inflation Reduction Act of 2022 extended federal tax credits for energy-efficient updates, offering homeowners significant savings.
Staying informed about legal tax-saving strategies is crucial in navigating the complex tax landscape. For personalized advice and assistance in implementing these strategies, contact Coastal Tax & Accounting at 843.549.5561. Our team of experts is ready to help you make the most of your financial planning.