Taxes are an integral part of a civilized society; the law requires us to pay our taxes. But, there’s nothing in the law that says you can’t utilize certain incentives to lower your tax liability. Here are eight ways to minimize your taxes. The IRS has limits, but use your creativity and the advice of a tax professional to reach those limits.
1. Tax Minimization, NOT Tax Evasion
The U.S. Supreme Court reminds us that tax avoidance is not illegal, but tax evasion is Approach those lines, but do not cross them. There are plenty of ways to legally minimize your taxes.
2. Self-Employed or Rental Property Owners
The best options for lowering taxes usually involve being self-employed or owning rental real estate. There is the opportunity to use depreciation, a calculated non-cash expense, to lower your taxable profits from a business or rental property. You can also find ways to legally shift income.
3. Hiring Family Members
If you are self-employed, you can hire family members, even minor children. This shifts net profit from your tax bracket to someone who may be in a no-tax bracket. This benefit is multiplies if you help the minor child use income to fund a Roth IRA which gives a head start on retirement savings, or provides a tax-free way to save for college.
4. Medical Expenses
You can also choose to supplement medical expenses through a Medical Expense Reimbursement Plan (MERP) sponsored by your business. Everyone is going to have medical expenses, but through this incentive, you can now get a legal tax subsidy.
5. Minimize Taxes on a W-2
If you are a W-2 employee, the best options are employer-sponsored benefits. Take advantage of any benefit that shifts income to a tax-deferred vehicle, such as employer-sponsored retirement plans and flexible spending accounts for health care.
6. Investing Strategies
If you have disposable income, you can consider investing in municipal bonds which produce tax-exempt income. Investing in partnerships, like oil and gas exploration, which produce depreciation and losses can also be used to offset your income.
7. Lower Taxes Through Retirement Accounts
Lowering taxes in the current year is what most people are concerned about, but it’s also advisable to plan ahead for taxes in retirement. If you put aside money in your IRA or company 401(k) you’re lowering your current tax bill. But you’ll find that the IRS will be waiting to take its share when you start taking distributions in retirement. But, you can lower your future tax bill by diversifying where your retirement money is held. By funding or converting other IRA funds to a Roth IRA, you’ll have the option to withdraw funds tax free in retirement or allow them to continue to grow because you won’t have to take a minimum distribution from these accounts.
8. Estate Planning
Roth IRAs are preferable compared to traditional IRAs. Roth IRAs are easier to pass on to heirs, and the tax ramifications of traditional IRAs are more detrimental. Because of income threshold limits, you may not directly qualify for opening or funding a Roth IRA, but there are ways to navigate through the rules to fund a backdoor Roth IRA.
Talk to a tax professional about protecting your wealth and estate planning options.