No one wants to pay taxes, but they don’t have a choice. Thankfully, there are ways to reduce the amount of taxes that Americans must pay to the government, including deductions, credits, and investment strategies. Individuals can use some of these strategies, and small businesses can use others. Keep reading for five legal ways to reduce your taxes.
1. Investment Opportunities
Investors can use the opportunity zone act to reduce their taxes. They take money from the sale of stocks and invest it in low-income areas to create jobs and economic growth. This way, investors do not have to pay capital gains tax for up to ten years.
Investors can also avoid capital gains by donating stock gifts to charities. Money in a donor-advised fund will not be taxed for capital gains, and investors can deduct this from income taxes.
By contributing to retirement accounts, individuals reduce their amount of taxable income. These investments will grow without taxes until the individual retires. Individuals can fund Roth accounts after taxes, but the money still grows tax-free and can be withdrawn tax-free in retirement.
2. Self-Employed Deductions
People who are part-time or full-time self-employed can take several tax deductions. Self-employed people can deduct vehicle mileage, advertising, a percent of home internet charges, a percent of cell phone charges, professional dues, office supplies, and travel expenses. Individuals may also be able to deduct health, dental, or long-term care insurance premiums. Many people use the home office deduction. To qualify for this, a homeowner must use a space solely for business purposes. For example, if a home office is used completely as an office for the self-employed individual, and it makes up one-sixth of the home’s living space, the individual can deduct one-sixth of the mortgage and utility fees.
3. Higher Education Credits
The American Opportunity Tax Credit allows a credit of $2,500 for a student for four years. Because it is a credit, taxpayers subtract it from the total amount of taxes owed. Up to $1,000 can be refundable even if they do not pay taxes. The Lifetime Learning Credit gives individuals a $2,000 credit to help pay for college courses that improve job skills.
4. Charitable Contributions
Individuals can deduct charitable contributions made using payroll deduction, cash, checks, or donations of goods. Usually, people need to itemize to claim deductions. People can donate items and clothing that they no longer need to charities. Many people can deduct the money they give to a local church or religious organization. Individuals who help sponsor mission trips or other charitable work can also deduct this from their taxes.
5. Utilize Flexible Spending Accounts
If an employer offers flexible spending accounts, individuals can pay for medical, dental, and vision expenses with tax-free money. An FSA deducts money from payroll before taxes and puts it into an account for medical expenses. This money is for copays at the doctor, prescription medications, eyeglasses, and even over-the-counter medications. These accounts come with a limit on how much can be put in annually. If taxpayers do not use the money by the end of the year, it is lost. If taxpayers keep careful records, they can utilize FSAs to save a lot of money on their taxes.
In today’s economy, Americans look for as many ways to save money as possible. Use some of these tips to pay fewer taxes and save money.