The IRS issued an annual warning to taxpayers called the “Dirty Dozen.” The warning was issued through a public service announcement detailing 12 current tax-related “scams” (IRS’s terminology). The IRS has noticed over the past year that many of these activities gain popularity around tax season. However, the Internal Revenue Service (IRS) does not provide a guide detailing the 12 simplest ways taxpayers might lawfully reduce their federal income tax obligations. As a result, we provide “the acceptable dozen.” 1. Retirement account For quite some time, retirement plans have been a great tool to delay and lower tax liability. A tax break is available for those who put money into qualified retirement plans like a standard 401(k) or an IRA. People can benefit from postponing their tax payments, and they might even pay less if taxes are decreased in the future. This could also be the case if they fall into a lower tax group when they retire. In contrast, contributions to a Roth 401(k) or Roth IRA are not tax-deductible. However, they may allow the account holder to avoid paying taxes on future earnings. Alternative retirement plans abound, each with its own unique set of advantages. 2. Health insurance claims Some types of accounts provide significant tax benefits, and so do several others. Health savings accounts (HSAs) can have an even more significant impact on covering medical bills while cutting taxes than flexible spending accounts (FSAs). Contributions to an HSA are deducted before taxes are calculated, profits grow tax-free, and disbursements (when used to pay for qualified medical costs) are not taxable. 3. Budgeting for Education A 529 plan and education savings accounts are two more tax-advantaged accounts that save money for future educational costs. The earnings on a 529 plan can grow tax-deferred, and withdrawals can be made tax-free if the money is utilized for approved education costs. Similarly, with an ESA, eligible individuals can make contributions, watch their money grow tax-free, and then use that growth to pay for approved expenses without incurring any tax liability. 4. Owning a home While it’s not a good idea to buy a house to save money on taxes, many people find that their primary residence is the best possible tax haven. There are caps on mortgage interest and property taxes that homeowners can deduct. Not only might homeowners potentially profit from tax rebates, but they can also exclude a sizable portion of capital gains when selling their houses. 5. Municipal bonds The same logic that says you shouldn’t buy a house to deduct the mortgage interest also applies to your investing decisions. The phrase “the tax tail should not wag the investment dog” is often used to express this idea—however, municipal bonds and other types of investing offer significant tax benefits. As a general rule, the federal government does not tax the interest received on municipal bonds. 6. Qualified small business stock Stock in a qualified small firm that has been held for more than five years may be sold without capital gains tax under certain circumstances. If the investor keeps the original stock for more than six months and buys new QSBS within 60 days of selling the original stock, the rollover may be tax-free. QSBS can be a powerful shelter for many taxpayers, but only if the stock was issued by a domestic C business and met numerous other requirements. 7. Tax-aware portfolio management Effective tax-saving investing solutions are available in a variety of forms. Investing in growth stocks is meant to yield little or no current income, but big long-term profits can help delay and cut taxes. Nonetheless, tax considerations should not be the driving force behind an investment decision. 8. Donations to a charity If you are a taxpayer with a generous bent, you can lower your tax bill by donating to charity. Direct or indirect donations from legal entities like charity trusts may be tax deductible. And if you’d rather not pay taxes on your capital gains, you can get a tax write-off for the total market value of the assets you donate instead of just the amount you put in. Donor-advised funds and private foundations can make it much simpler to implement this plan. 9. Life insurance Just as buying a property or investing in a portfolio shouldn’t be driven purely by tax considerations, the same is valid for purchasing life insurance. Like buying a property or investing, a life insurance policy can result in significant tax benefits. To begin, the federal government does not tax the death benefit from most life insurance policies. Private placement life insurance (PPLI) may be an option for individuals looking to maximize their tax benefits from life insurance. With PPLI, you may be able to shield future appreciation on a select few high-yield investments. However, PPLI is governed by rigorous and convoluted regulations that necessitate extreme caution while employing it. 10. Qualified opportunity zones Capital gains can be deferred if invested in qualifying opportunity zones, and taxpayers benefit from this. Another advantage of long-term investing is the ability to defer financial gains for an unlimited time. 11. Exchanges of equal value Another effective strategy is to use a like-kind exchange to defer paying taxes on the gain or loss. Real estate, life insurance, endowments, and annuities are all suitable vehicles for this purpose. Once more, this kind of shift requires that you approach it with the utmost prudence. 12. Business strategy There are various strategies available to business owners to reduce their tax obligations. In addition to the tax-preferred accounts listed above, many employee benefits, like health insurance, can come with large tax breaks. In some situations, business owners can postpone paying taxes until they sell their company using various tax-advantaged equity incentive arrangements.
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After spending many years studying information technology, specializing in web development, digital marketing, and search engine optimization (SEO), I enjoy applying my skills and experience in helping others achieve their goals online.As a marketing specialist at Credkeeper, I help people get the most out of their online reputation. Your prospects perform Internet searches for your name before they buy from you. What they see on the first page of Google outweighs almost all other marketing! What do people currently see when they search your name on the Internet?If you would like to know more about Credkeeper and what we can do for you, feel free to reach out to me!
