You can think of taxes as a “subscription fee” paid by citizens to the state/government. In return, the government promises its citizens healthcare, infrastructure, education, and security. The technicalities surrounding taxation continue to remain a political challenge in all countries.
Some countries levy high tax rates while others may become tax-free havens for the corrupt. Regardless, wherever one lives, there are local, state, and federal laws that determine the amount of tax one should be paying on her/his income.
Higher income should equal higher taxes, right? Not necessarily. It is an open secret that the rich pay less taxes than ordinary working-class citizens. Wealthy Americans often joke about how they pay less in taxes than their secretaries or other employees. However, before assuming that all wealthy individuals are tax-evaders or involved in unlawful practices, educating oneself on the subject can help understand tax management better.
Why is managing one’s taxes necessary? Because they help protect income from unnecessary taxes. After all, nobody should be paying over and above in taxes simply because they are unaware of legal ways to avoid taxes or filthy rich.
So how can you protect your income from taxation?
1. Spend on retirement accounts
401(k)s and Roth IRA are common examples floated as options for retirement accounts. These accounts take a sizeable payment every month from an individual’s income and invest it in a portfolio. These monthly payments are accumulated in these accounts, often with restricted access to those funds. The gains from these accounts are realized when a person reaches retirement age.
Any contributions made to these retirement accounts help in reducing a person’s taxable income. If one is looking to educate themselves further on opportunities that help reduce tax rates on one’s income, an LLM in tax will assist in gaining that financial knowledge. If not that, consult a tax expert to avoid making costly mistakes.
By making contributions to these schemes, a person can save for their retirement while enjoying lower taxable income in the present. Some retirement accounts tax contributions while promising tax-free withdrawals in the future. In contrast, others promise tax-free contributions with taxable withdrawals in the future. A financial advisor can provide better guidance regarding which type of accounts are favorable depending on a person’s financial situation.
2. Give charitable donations
The most significant charity events often host ultra-wealthy individuals. This fusion between wealth and charity has its roots deep in tradition. Giving away large sums in charity is common among many wealthy individuals. Giving charity might be backed by altruistic motivations for the majority.
However, it would be unfair to deny that working with charitable trusts and foundations can often lead to significant tax deductions. So, what better way to earn large amounts of tax deductibles while simultaneously putting one’s money to charitable uses.
3. Interest on municipal bonds
Buying government bonds is one of the oldest ways for the state to raise capital from the public. Municipal bonds are borrowed money from the public. As compensation, the borrowing entity (a government body) pays a fixed amount of interest on those bonds. The funds are often locked away until the date of maturity. Only then the investor gets access to their original investment.
Municipal bonds are one of the safest forms of financial investment simply because the chances of a government defaulting on its loans are low. However, the investment return on these bonds is also lower than other riskier opportunities. Additionally, the interest payments received on bonds are exempt from taxes depending on where one lives. This makes them an attractive opportunity for investors who seek to protect their income from taxation.
4. Start your own LLC
Becoming a business owner by starting a limited liability company can also save an individual from excessive taxation. Business expenses are deducted from the income, thereby lowering the amount of taxable income. Instead of paying all daily costs out of pocket, these expenses can be charged to the business. Doing so reduces the surplus amount on which the state levies taxes.
Internal Revenues Service (IRS) provides a detailed guideline regarding how business owners can deduct their expenses from their business accounts. However, it is always better for an LLC to pay for expenses as they are paid out of pre-taxed income. The income which reaches an individual’s pocket is often taxed before the individual gains access to it.
5. Take advantage of health savings accounts
Healthcare can be costly, especially for those who are not on a health insurance plan. However, there are Health Savings Accounts that exist which can take care of unforeseen healthcare expenses. They are similar to 401(k) accounts. HSA holders contribute monthly payments, which are tax-deductible.
It means that all premiums paid towards a health savings accounts will reduce the taxable amount on one’s income. Moreover, these funds can then grow without any requirements to pay taxes on their earnings. An additional benefit of HSAs is that individuals can use the money to pay for health-related emergencies. The withdrawals on these accounts are not taxed either if used for medical payments.
6. Understand tax credits
There are opportunities such as IRS Tax Credits or Earned Income Tax Credits for the low-income earners out there. Individuals can claim these credits depending on the domestic situation of an earner. Individuals with more children can claim higher credits in comparison to singles. Moreover, students and low-income earners looking to save up for their retirement can also benefit from these tax credit opportunities. That way, their small pocket sizes do not shrink further because of taxation.
Paying taxes is the responsibility of all law-abiding citizens. Evading taxes is a criminal offense and can get one behind bars as well. Therefore, everyone who is an income earner should take taxation seriously. At the same time, it is equally important to pay what is legally owed instead of having to pay extra because of insufficient knowledge.
A little bit of research and education can result in thousands of dollars of savings in the long run, which one can put to good use without incurring the wrath of the state.
Shift Frequency © 2021 – Want To Protect Your Income From Taxes?
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