You may be working hard to sustain your family and provide them with all the luxuries of life. But you need to know how to preserve your hard-earned income and enjoy Tax Benefits. There are several ways by which earned income is taxed. It is deducted at state and federal levels as well as by Medicare and Social Security. You cannot avoid tax payment as it is illegal everywhere. As a good and responsible citizen, you are expected to pay proper tax on time to the concerned authorities. But you can avail a few strategies to save some tax amount.
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Tips on how to save income tax
- Long-term capital gains: It is necessary to invest wisely to grow wealth. You can invest in real estate, bonds mutual funds and stocks as it comes with significant long-term capital gains. If you hold an asset for over a year, you can derive a preferential tax rate approximately of 1, 15 or 20 percent on the capital gain. This again depends on your income slab. However, if you hold the asset for just a few months before selling, then ordinary income rates are applied to your capital gains. To grow wealth, you need to be aware of short-term vs. long-term capital gain rates. Liability on capital gains tax can be offset with Tax-loss harvesting if securities are sold at a loss.
- Municipal Bonds: Investing your hard-earned money on such bonds means, you will be lending money to a local entity or state. This will be for some predetermined period on designated interest payments. On the bond maturity date, you will get back the entire amount invested. It is generally not taxed federally, locally or by the state. This depends on your location of residence. Investors are attracted to municipal bonds as they are tax-free interest payments. When compared to corporate bonds, municipal bonds are said to come with reduced default rates. For corporate, it is around 2.28%, while for the municipal bonds, it is 0.1%. Although municipal bonds offer low-interest rates, you can enjoy greater benefit from tax.
- Avail IRS Credits: You can avail several IRS tax credits like ‘Earned IT Credit’ to derive Tax Benefits. A low-income bracket taxpayer without children in 2019 received credits up to $529. But taxpayers having 3+ children are entitled to credits up to $6,557. Eligible students are provided with a maximum of $2,500 annually by American Opportunity Credit. Lower and moderate-income bracket people can avail of ‘Saver’s credit’ to enjoy retirement savings. Individuals are allowed to receive credits half-credit contributions to an ‘ABLE account’, an IRA or a plan. Depending on individual income, ‘Child & Dependent Care credit’ can help tackle expenses to raise children by providing a credit of up to $6,000.
- Business: Another way to make money and save income tax is to start a new business. From income, generally, there are deducted different types of day-to-day expenses, thus reducing total tax obligations. The health insurance premium is an important tax deduction. Adhering to the set IRS guidelines, you can deduct some home expenses with home-office deduction. Also is deducted part of internet and utilities used. SECURE Act was established in 2019 allowing employers to provide investment options in 401(k) plans in the form of annuities. Small entrepreneurs can also enjoy tax rebates for establishing employee retirement plan auto-enrollment. It is also available to those providing their employees with retirement options and join multiple plans.
The above are just a few of the many ways by which you can benefit from tax. You can consult a professional to know how you can save your hard-earned money from taxes.