Nobody likes paying taxes. The good news is that while taxes are mandatory, there are several strategies that you can use to protect your income and ward off certain taxes. Read on to learn five of the most effective tax reduction strategies that will help you maximize your savings and stretch your capital to its fullest potential.
Invest Your Capital in Municipal Bonds
Purchasing a municipal bond means lending money to a local or state government entity for a fixed number of interest payments over a set period of time. Municipal bonds are fixed-income investments that may result in higher after-tax returns than similar taxable government or corporate issues. Generally, interest on municipal bonds is exempt from federal taxes. Depending on where you live, it may even be exempt from local and state taxes! This makes municipal bonds an attractive option for investors. Once a bond reaches maturity, the full amount of the buyer’s original investment is returned.
However, note that municipal bonds usually pay lower interest rates. The tax-equivalent yield resulting from tax benefits is what makes them attractive to some investors. Hence, you will generally enjoy a higher tax-equivalent yield the higher your tax bracket.
Aim for Long-Term Capital Gains
To grow your wealth, understand the differences between long-term versus short-term capital gains. When you invest in stocks, bonds, real estate, and mutual funds, you will accrue better tax treatment for your long-term capital gains!
For instance, if an investor holds onto an asset for less than a year, their capital gain is taxed at ordinary income rates. However, if they hold it for longer than a year, they may enjoy preferential tax rates on their capital gain of 0%, 15%, or 20% depending on their income level!
Start a Side-Business
A side hustle can offer many tax advantages! Expenses made for a daily business can be deduced from your income, which reduces your total tax obligation. For self-employed individuals, health insurance premiums may also be tax deductions!
A business owner is allowed under Internal Revenue Service (IRS) guidelines to deduct a part of their home expenses under the home office deduction. The cost of utilities and internet used by the business is also deductible from income.
However, in order to first qualify, the IRS must evaluate a number of factors to determine whether the taxpayers have realized a profit in the last three to five years. Only if the business is deemed engaged for profit can the taxpayer claim deductions.
Utilize a Health Savings Account (HSA)
You can use a health savings account (HSA) to reduce taxes if you are an employee with a high-deductible health insurance plan. HSA contributions by payroll deduction can be excluded from an employee’s taxable income. Furthermore, an individual’s direct contribution to an HSA is fully tax-deductible from their income. In 2021, the maximum deductible contribution level is $3,650 for an individual and $7,300 for a family. The funds in an HSA can thereby grow without accruing taxes on earnings.
If you want to learn more about how to protect your income from taxes, visit our website today! We offer online training on how to protect your wealth, including online webinars and courses as well as instructional videos to help you learn at your own pace.
