Paying income tax out of your hard-earned money may pinch you quite a bit if you’ve not planned your income and expenses. Some tax planning measures can ensure that you pay less income tax.
Clueless about tax planning?! Don’t worry. We’ve got you covered with these tips to take advantage of the tax breaks and reduce your income tax significantly.
Benefit from Health Savings Account
You should consider opening a Health Savings Account for maximizing some of the tax benefits on your health insurance. Some workplaces also offer employees insurance plans combined with a Health Savings Account. You should check with your employer if you can opt for such a plan.
The direct tax advantage of a Health Savings Account is that it is tax free. You can use the amount to invest in mutual funds or to make withdrawals for medical expenses.
Charity and donations
Are you one of the generous kinds and frequently give away money to charitable organizations and events? Your good deeds count not only for your conscience but also for tax savings.
The money you donate or expenses you incur while supporting such charitable purposes are allowed for deductions under the tax law. You need to save the receipts to claim these deductions at the time of filing. A tax attorney can help you file your returns with appropriate claims for such deductions.
Plan your tax- deferred savings
A tax-deferred retirement account can reduce your tax liability with a significant margin. Make sure that you qualify for the benefit by investing in the right kind of savings plan.
Many new businesses are functioning and flourishing from within the boundaries of the owners’ home. This turns out to be way cheaper than renting an office space. Besides, if you run a home-office, there are quite a few deductions you can claim under the income tax laws.
Part or whole of your utility and maintenance bills can be categorized as business expense, instead of being taxed as personal expense. Similarly home insurance premiums can be accounted for under business expenses. Such adjustments could significantly slash the taxable income.
Put money in retirement account
Individual Retirement Accounts are tax free too. So, if you’re not participating at a retirement plan at your workplace, you can always open an Individual Retirement Account and take the tax advantage.
Child care reimbursement account
You will surely end up encountering huge expenses on child care. You need to consider not only the modern gadgets and gizmos that are quintessential for raising a child, but also expenses on health and education.
By using a child care reimbursement account at work, you can manage tax savings on these expenses. Similar benefits are also available on expenses incurred for caring for a disabled spouse or relative. Enquire about such tax saving plans at your workplace.
Invest in tax-free bonds
Tax-free bonds not only carry the advantage of tax savings, but these bonds usually come with a lower financial risk than other types of investment options. Municipal bonds issued by government bodies are one of the tax-free investment avenues you can consider. The interest earned on tax-free bonds is exempt from income tax. That’s why even if they appear to be carrying lower rates of interest; these bonds are just as lucrative as corporate bonds.
You might want to gift a significant sum to your close relative or any charitable organization. Instead of just doling out cash, consider giving a part of your investments in shares or mutual funds. You should have invested for at least more than a year in the securities you plan to give as a gift.
What’s the advantage, you’d ask. Well, for one, the value of the securities will be taken at their current market value and not its purchase value. Usually, the securities would have gained some market value over the years that you’ve held them. This way, your contribution would turn out to be more valuable than your actual spending.
Education Tax breaks
You can take advantage of tax breaks on education fees too. Let’s give some quick info on how this works. Say, your employer pays for your course fee and deducts the amount from your salary. Now this course fee will not count towards your salary which constitutes your taxable income.
If you’re paying for the course fee yourself, you can take advantage of Lifetime Learning Credit. This could fetch you tax savings of around USD 2000 on the education expenses.
Don’t miss out on your start-up advantage
The government sees huge potential in technology and innovation in the start-up space. Tax incentives are offered to encourage entrepreneurs and innovators. If you are registered as an S corporation, or as sole proprietor under Schedule C, you get the benefit of deductions of 20%. This can effectively lower the taxes payable by you. You may have to do some tax planning to ensure that your earnings don’t cross the qualifying limit for this tax benefit.
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