Strategies to Protect Your Income From Taxes

  • 20th Jun'22
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Income is taxed on the federal, state, and nearby levels, and earned earnings challenge extra levies to fund Social Security and Medicare, to name a few. Also, despite all the knowledge about taxes you can never get away from paying taxes. It is mainly because taxes are hard to avoid. However, there are numerous techniques to assist ward them off. For example: Apps to help reach your money goals. However, for in-depth knowledge tet's continue reading about them.

 

Income Taxes

 

Strategies to Protect Your Income From Taxes

There are several tax planning strategies online which you can put into practice to protect your income from taxes. However, the limiting knowledge about the income taxes always becomes a hurdle. So, to ensure you have much clear ideas about protecting your taxes here are the strategies you can use to maximize your return from income taxes.

 

Income Tax

 

Invest in Municipal Bonds

Buying a municipal bond essentially means lending money to a state or local governmental entity for a set number of interest payments over a predetermined period. Once the bond reaches its maturity date, the full amount of the original investment is repaid to the buyer.

Interest on municipal bonds is exempt from federal taxes and may be tax-exempt at the state and local levels as well, depending on where you live. Tax-free interest payments make municipal bonds attractive to investors.

Municipal bonds historically have lower default rates than their corporate bond counterparts. A study of municipal bonds from 1970 to 2019 found that the default rate was 0.1% for investment-grade municipal bonds versus 2.25% for global corporate issuers. However, municipalities typically pay lower interest rates. Because of the tax benefits, municipal bonds' tax-equivalent yield makes them attractive to some investors. The higher your tax bracket, the higher your tax-equivalent yield.

 

Shoot for Long-Term Capital Gains

Investing can be an important tool in growing wealth. An additional benefit of investing in stocks, mutual funds, bonds, and real estate is the favorable tax treatment for long-term capital gains.

An investor holding a capital asset for longer than one year enjoys a preferential tax rate of 0%, 15%, or 20% on the capital gain, depending on the investor’s income level. If the asset is held for less than a year before selling, the capital gain is taxed at ordinary income rates. Understanding long-term versus short-term capital gains rates is important for growing wealth.

Tax-loss harvesting can also offset a capital gains tax liability by selling securities at a loss. If capital losses exceed capital gains, the lesser of $3,000 of the excess losses or the net capital loss can be deducted from other income. Capital losses in excess of $3,000 can be carried forward to later tax years.

 

Do Business

In addition to creating additional income, a side business offers many tax advantages. When used in the course of daily business, many expenses can be deducted from income, reducing the total tax obligation. Especially important tax deductions for self-employed individuals are health insurance premiums which are available if special requirements are met. Also, by strictly following Internal Revenue Service (IRS) guidelines, a business owner may deduct part of their home expenses with the home office deduction. 

The portion of utilities and internet used in the business may also be deducted from income.7 In order to claim these deductions, the taxpayer must conduct business to make a profit. The IRS evaluates a number of factors, outlined in Publication 535. Taxpayers who realize a profit in three of the last five years are presumed to be engaged in a business for profit.

 

Max Out Employee Benefits and Retirement Accounts

In 2022, taxable income can be reduced for contributions up to $20,500 to a 401(k) or 403(b) plan (up from $19,500 in 2021). Furthermore, the 50 or older can add up to $6,500 to the basic workplace retirement plan contribution. For example, an employee earning $100,000 in 2021 who contributes $19,500 to a 401(k) reduces their taxable income to only $80,500.

In 2022, taxable income can be reduced for contributions up to $20,500 to a 401(k)  or 403(b) plan (up from $19,500 in 2021).10 Those 50 or older can add $6,500 to the basic workplace retirement plan contribution. For example, an employee earning $100,000 in 2021 who contributes $19,500 to a 401(k) reduces their taxable income to only $80,500.

 

Use Health Saving Accounts

Employees with a high-deductible health insurance plan can use a health savings account (HSA) to reduce taxes. As with a 401(k), HSA contributions (which may be matched by the employer) by payroll deduction are excluded from the employee’s taxable income; an individual’s direct contributions to an HSA are 100% tax-deductible from their income. 

For 2021, the maximum deductible contribution level is $3,600 for an individual and $7,200 for a family. Also, in 2022, the maximum deductible contributions rose to $3,650 for individuals and $7,300 for families. More importantly, these funds can then grow without the requirement to pay tax on the earnings. An extra tax benefit of an HSA is that when used to pay for qualified medical expenses, withdrawals aren’t taxed, either.

 

Conclusion

So, here are few ways to strategize and protect your income from taxes. However, you can always educate yourself to improve your financial abilities. For example: You can listen to 10 personal finance podcasts to learn more. You can even teach yourself ways to save money for christmas.

 

We at OpenGrowth, are committed to keeping you updated with the best content on the latest trendy topics from any major field. Also, both your feedback and suggestions are valuable to us. So, do share them in the comment section below.

Sources/References:

*Note: The content published above was made in collaboration with our members.

About the author:

Sunny Samanta, OpenGrowth Content Team

A lone wolf by definition, a writer by heart, and a lost star with ambitions to light up the dark both inside and around me, sometimes by immersing myself into books or video games or traveling with a backpack to an uncertain destination believing that life is all about the choices we make and we don't.


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