There is nothing worse than working hard for your money only to find out later that most of it will be going to taxes. Thankfully, there are different strategies you can utilize to reduce the amount you will need to pay in income taxes. These practices will not only protect your income now but they will also help set you up for greater success in the future.
- Municipal Bonds
By investing in municipal bonds you are in essence giving your money to the state as a loan of sorts. As such, over time you will receive interest payments. The full amount of the bond will be returned to you once the bond has reached its maturity date.
The interest that you receive from municipal bonds is not taxed on a federal level, and might even be exempt from both state and local taxes.
- Long-Term Capital Gains
There are many short-term investment schemes that you can partake in, but if you want to focus on secure long-term investments, then real estate is one of the best areas for you to focus on. In part, this is because real estate has favorable tax rates on long-term capital. Depending on where you are and your income level, your tax rate for capital assets held for more than a year could be 0%, 15%, or 20%.
- Retirement Funds
When you are maxing out your retirement fund you are usually making contributions to either a 401(k) or 403(b) plan. In both of those cases the amount that you are putting in your retirement fund is deducted from your taxable income each year. There are also deductions that you get for contributing to IRA accounts according to the IRS guidelines.
- Health Savings Account (HSA)
Health savings accounts can also be tax deductible. This means that your contributions can be excluded from your taxable income. Even the individual contributions you make are 100% tax-deductible.
- Tax Credits
The IRS has many different ways in which one can reduce their taxes. One of these is the Earned Income Tax Credit. These tax credits include deductions and credits based on your income and household status. Always check the IRS guidelines for all the deductions and credits you are eligible for before filing your taxes.
