Denice R. Preston
Earned income is taxed on a federal, state, and local level. Social Security, Medicare, and other levies are also added. There are many ways to reduce taxes. Here are six strategies to help you protect your income against taxes.
Municipal Bonds: Investing in Municipal Bonds
Municipal bonds are loans to state or local governments for a certain number of interest payments. The total amount invested is returned to the purchaser once the bond has matured.
Municipal bonds are attractive to investors because they offer tax-free interest payments. Municipal bonds are attractive to investors because they offer tax-free interest.
Municipal bonds have historically had lower default rates than corporate bonds. In a study of municipal bond default rates from 1970 to 2019, the rate for investment-grade bonds was 0.1%, compared with 2.25% for corporate bonds. Municipal bonds are usually cheaper. Some investors are attracted to municipal bonds because of their tax equivalent yield.
Aim for long-term capital gains
Investments can help you grow your wealth. The favorable tax treatment of long-term capital gains is another benefit of investing in stocks, funds, and bonds.
Investors who hold a capital asset longer than a year can enjoy a tax rate preference of 0%, 15 or 20 percent on their capital gains, depending on their income. The capital gain tax rate is ordinary income if the asset has been held for less than one year. Understanding short-term and long-term capital gain tax rates is essential for increasing wealth. 3
The zero-rate bracket for long-term capital gains will apply to incomes up to $89250 for married couples filing jointly in 2023 (up from $83,350 for 2022) and $44,625 to single individuals in 2023 (up from $41,675 for 2022). Tax planners and investment advisors can help you determine the best time to sell depreciated or appreciated securities to maximize gains and minimize losses.
Tax loss harvesting can also offset capital gains tax by selling securities for a loss. Capital losses that exceed capital gains can be deducted as other income if the amount is less than $3,000 or the net loss. Capital losses exceeding $3,000 may be carried over to future tax years.
Start a Business
A side business can provide many tax benefits.
Many expenses incurred in the ordinary business can be deducted, reducing the tax burden. Health insurance premiums are a significant tax deduction for self-employed people.
A business owner can also take a portion of their home expenses as a deduction for establishing a home office by following the IRS guidelines. You can also deduct a portion of your income for utilities and internet.
To be eligible for these deductions, a taxpayer must make a profit. Publication 535 outlines how the IRS assesses various factors. Taxpayers that have made a profit three out of the past five years will be presumed to run a profitable business.
In 2019, the Setting, every community up for Retirement Enhancement (SECURE) Act, was passed. SECURE Act provides tax incentives for employers who offer retirement options and join multiple-employer pension plans.
Maximize Employee Benefits and Retirement Accounts
Contributions to $22,500 in 2023 can reduce taxable income (up from $20,000 in 2022). The fundamental workplace retirement contribution can be increased by $7,500 for those 50 and older (up from the $6,500 limit in 2022). For example, an employee who earns $100,000 in 2023 and contributes $22,500 into a 401(k) reduces their tax liability to just $77,500. 10
Tax breaks are available for people who do not have a workplace retirement plan. They can contribute up to $6.500 ($7.500 for those over 50) to a definitive individual pension account in 2023. (This is a significant increase from the $6,000 and $7,500, respectively, that was allowed in 2022). Taxpayers with workplace retirement plans or whose spouses have them may be able to deduct a portion of their traditional IRA contributions from their taxable income.
The IRS has detailed rules about whether and how much you can deduct. The IRS has specific restrictions on whether and how much you can remove. 11
The SECURE Act increased the age to 72. Before, account holders of 401(k), IRA, or 401(k) accounts had to take the required minimum distribution in the year they turned 70 1/2. The SECURE Act raised this age to 72. The SECURE Act 2.0 made a further change to this rule. The rule now starts at 73 for those born between 1951-1959 and 75 for those born after 1960. Tax implications may arise depending on which tax bracket an account holder falls into in the year of withdrawal. The SECURE Act eliminated the 70 1/2-year-old maximum age limit for traditional IRA contributions.
Use an HSA (Health Savings Account)
As with a 401(k), HSA contributions (which may be matched by the employer) are excluded from an employee’s taxable income; however, direct contributions to an HSA are 100% tax-deductible. HSA contributions made by payroll deduction (which can be matched by an employer) are excluded from an employee’s taxable income. Individual contributions to HSAs are also 100% tax deductible.
In 2023, the maximum contribution for a single person is $3.850; for a family, it’s $7.750 (up from $3.650 and $7.300, respectively, in 2022). The funds can grow without having to pay taxes on their earnings. Withdrawals from an HSA are not taxed when they’re used to cover qualified medical expenses.
Claim Tax Credits
Many IRS Tax Credits reduce taxes. One example is the Earned income tax credit. In 2023, low-income taxpayers could claim up to $7430 in credits if they have three or more children. They can also claim $6,604 if they have two children, $3,995 if there is only one child, and $600 unless there is none. This is an increase from the previous numbers of $6,935 with three or more children, $6,164 for two, $3.733 for one, and $560 in 2022.
The American Opportunity Tax Credit allows eligible students to receive a maximum of $2,500 annually for their first four years in higher education. The Lifetime Learning Credit offers a maximum 20% credit on up to $10,000 worth of qualified expenses or $2,000 for each return.
The Saver’s Credit is available to individuals with moderate or lower incomes looking to save money for retirement. Individuals can receive a tax credit of up to 50% of their contributions to a plan.
The Child Care Credit may help you offset expenses related to caring for your children or disabled dependents, depending on your income.
