Taxes are a part of life, but paying more than your fair share doesn't have to be. If you find yourself grumbling every tax season about how much you have to fork over to the government, you’re not alone. However, there are legitimate ways to reduce your tax burden and keep more of your hard-earned money. Levelheaded Bookkeeping can help you explore the strategies that are right for you. Finding the right tax strategy can help you pay less in taxes now and potentially save thousands of dollars in the years to come.
Understanding Your Tax Bracket
The first step in reducing your tax burden is understanding your tax bracket. The U.S. tax system, for example, is progressive, meaning the more you earn, the higher percentage you pay in taxes. By knowing which bracket you fall into, you can make strategic financial decisions that keep you in a lower bracket, thus reducing the overall amount you owe.
Use Deductions and Credits
Tax deductions and credits are powerful tools to lower your taxable income. Knowing which you can take will both lower your taxable income and the taxes owed. Tax deductions are places where your taxable income is reduced. Mortgage interest, student loan interest, and medical expenses reduce your taxable income by deducting those expenses from your total income amount. Tax credits reduce the taxes you owe in specific dollar amounts. The Child Tax Credit and Earned Income Tax Credit are examples of tax credits. Make sure you research and claim every deduction and credit you qualify for.
Self-employed business owners can take advantage of a variety of tax deductions. They can write off business expenses, home office costs, and even a portion of vehicle expenses. Be sure to keep meticulous records and work with a tax professional to ensure you're taking advantage of all available deductions when you own a small business. Â
Contribute to Retirement and Investment Accounts
Contributions to retirement accounts like a 401(k) or an IRA are often tax-deductible, meaning you don’t pay taxes on the money you contribute until you withdraw it during retirement. Contributing to your retirement accounts now not only gives you more for the future it also reduces your taxable income today. Putting money into these accounts for later can significantly lower your taxable income in the present.
Choosing strategic investment accounts can have tax benefits. Tax-efficient mutual funds or exchange-traded funds (ETFs) are managed in a way that minimizes taxable events like capital gains working for you to avoid unnecessary taxes on your investments now. Â
Bonds are another option for investing with tax strategy in mind. Municipal bonds offer interest income that is tax-free at the federal level. Bonds in general are a conservative investment option with low returns. The tax benefits can make them a beneficial option, for high-income earners.
Limiting your Tax Burden by Working with a ProfessionalÂ
Paying less taxes is about being proactive and strategic in your financial planning. By understanding your tax obligations, and exploring deductions and credits with an experienced professional you can significantly reduce your tax burden and keep more money in your pocket.
Tax laws are complicated, and they change frequently. Hiring a tax professional ensures that you're taking advantage of all the deductions and credits available to you without the hassles.Â
Everyone's financial situation is unique, which is why Levelheaded Bookkeeping offers customized services to every client. It’s crucial to assess your circumstances and consult with a tax advisor to create a personalized tax strategy that suits your needs and goals.