Are you dreading tax time again? The stress is natural. Staying under the tax threshold seems more complicated and complex each year, especially when you have a business.
For that reason, you need to learn how to avoid owing taxes. You don’t have to pay taxes even when taxes are due. Thankfully, there are legal things that you can do to defer, skip out on, or prevent you from having to pay your taxes.
Check out this quick guide to learn the best tax avoidance tips that you can use to minimize your tax burden going forward.
1. Maximize Retirement Contributions
Contributing to a retirement account such as a 401(k) or IRA allows pre-tax earnings to go into a savings plan that will not be taxed until withdrawn. In other words, taxes are deferred until the earned money is withdrawn. Establishing an appropriate savings goal and increasing contributions each year can ensure that an individual does not owe money in taxes due to income exceeding the necessary limit.
Employers may also offer an employer match program where they contribute to retirement accounts in addition to the employee’s contribution. This allows an individual to increase the amount of money saved without increasing their income. It maximizes retirement amounts without causing an increase in taxes.
2. Take Advantage of Tax Credits and Deductions
Tax credits and deductions reduce the total amount of taxes a person owes. Tax credits are more beneficial than deductions, as they reduce taxes owed dollar-for-dollar. Here are some of the common tax credits:
- Child Tax Credit
- Earned Income Tax Credit
- Solar Credit
Deductions, on the other hand, reduce a person’s total income taxed. Standard deductions include charitable contributions, student loan interest, self-employed health insurance, and retirement savings.
By taking advantage of tax credits and deductions, a person can reduce the total amount of taxes owed, potentially avoiding owing taxes altogether.
3. Pay Quarterly Estimated Taxes
This means you will pay a portion of your taxes periodically during the year rather than one lump sum at tax time. This can help when you have a fluctuating income or irregular pay. If you are self-employed, you should keep track of your income and expenses throughout the year, set aside a portion of your salary to cover taxes, and remit payments when due.
With quarterly estimated taxes, you will pay income taxes throughout the year rather than only one lump sum at the end of the year. Estimates are based on your taxable income for the year and your respective tax brackets for each quarter. By dividing the taxes owed annually into four sets of payments, you can save yourself from owing a large sum at the end of the year.
Staying current on the tax laws is essential to pay the correct taxes. Consulting a tax professional can also help you review all relevant tax documents. It ensures compliance with tax laws and protects against unexpected liability.
4. Leverage Charitable Donations
One great way to avoid owing taxes is by leveraging charitable donations. Giving to a qualified charity can result in sizable tax deductions. This can be done by donating cash to charity, donating goods and property, or even volunteering services.
It is essential to maintain accurate records of any donation, including keeping copies of the documents supporting the deduction. Make sure to research in advance to verify whether the charity chosen is qualified for beliefs, as only donations to a qualified charity are eligible for deductions.
It is also a good idea to spread donations throughout the year, especially if they are more significant. This will help spread out the tax benefit and reduce the impact of the taxes owed. Charitable donations can be an effective way to minimize taxes if it is done thoughtfully.
5. Utilize Capital Gains Exemptions
This can be achieved by investing in stocks and mutual funds with a long-term gain rather than a short-term gain. Taking advantage of a capital gains exemption can be smart, as you can keep more money in your pocket. Additionally, ensuring the payments are reported accurately is essential, as mistakes can lead to owing taxes.
You can also reinvest profits into qualified investments to defer taxes. Consider other income sources, such as dividends, interest, real estate, business income, etc., when evaluating your tax liability. Utilizing capital gains exemptions can significantly reduce the tax burden, so consider it when filing your taxes.
6. Consider Third-Party Assistance
Taxpayers can save money by hiring an experienced tax accountant, enrolled agent, or tax relief specialist to help manage their taxes. Professional tax help can ensure returns are prepared correctly, practical deductions are taken, and the amount of taxes due is minimized or avoided entirely.
Tax relief specialists can also help taxpayers if they’ve already received a notice that they owe additional taxes. Tax professionals can review the notice and the return and explain the situation. It proposes solutions to waive the entire charge.
Tax professionals can help negotiate affordable and manageable payments that fit the taxpayer’s budget if a payment plan is needed and can’t be arranged.
7. Plan Your Tax Strategy in Advance
A tax planning strategy is the best way to avoid owing taxes. Familiarizing yourself with the tax laws is essential to ensure you properly take advantage of tax breaks. Make sure to consult a tax expert when drawing up tax plans.
Consider how to benefit from pre-tax deductions or investments such as a 401k or HSA account. Also, look into how to defer income or make estimated tax payments to reduce the amount of taxes due. Additionally, not underestimating the taxes you will owe means you can adjust your withholding rate and make extra payments throughout the year to avoid owing.
Lastly, look into tax credits to reduce the amount of taxes owed. Taxes do not need to be scary if you plan and understand the different strategies available. Suppose you wish to lessen your tax obligation by utilizing other government-provided credits, deductions, and other incentives, consider tax optimization.
Understanding How to Avoid Owing Taxes
Planning and learning about deductions can help lessen the burden when avoiding owing taxes. Keeping good records and talking to a tax professional are great ways to stay organized and handle taxes correctly. Don’t be intimidated – take action to help avoid owing taxes this year.
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