Photo: Tyler Franta / Unsplash
Tax is something we all have to pay. Every year, we input everything into a detailed tax calculator to work out what we owe and, ultimately, chip away at that figure wherever we can. The good news is that there are legal and savvy ways to reduce your tax obligations and keep that bill as slimline as possible.
Here are five methods you can deploy to minimize your tax obligations this year:
1. Harvest Tax Losses
Do you have any investments that have decreased in value? If so, you can sell them to lower your tax obligations. This method works because it allows you to write off the losses against your general income and any investments that increased up to the latest limit set by the Internal Revenue Service.
You can also carry forward any losses you can’t use this year to reduce your taxes in the future. However, if you have an investment that has grown in value and you know you have a big tax bill coming this year, it’s sensible to hold off on selling it until the next financial year. That way, you won’t add the tax from that sale to this year’s bumper bill.
2. Pay More Into Your Individual Retirement Account
15% of Americans have no retirement savings at all. Even if you do have an IRA, but you’re not putting in as much as you could, you’re ripping yourself off at tax time. By making voluntary contributions to your retirement savings, you can reduce your tax obligations while supporting your future life. So, it’s definitely worth upping those contributions.
3. Be Charitable
Around 50% of Americans say they have donated to charity in the last year. The good news for you, if you are charitable, is that you can reduce your taxes by making these contributions to different causes. You do have to itemize your tax deductions to do this, though, and anything over $250 has to have a receipt with it to be accepted.
It’s also worth knowing that donations of goods can also count. So, whether you dropped puppy food and toys to a local dog charity or donated $10 every month to your favorite animal sanctuary – it all counts.
If you struggle to know which payments in your accounts were charitable, consider getting an app that enables you to categorize expenses. Such apps make it easy to track your spending and identify charitable payments when you’re doing your taxes.
4. Get Those Tax Credits
Tax credits are great because they don’t just reduce your taxable income, but they can also reduce how much tax you owe overall. There are lots of tax credits available, and not everybody is suitable, but it is worth checking if you are, just in case.
5. Don’t Talk Down Business Expenses
The number of people in America working from home tripled during the Covid-19 pandemic, and if you are still working from home now, you should be maximizing your business expenses.
Simply put, the more business expenses you write off, the lower your tax will be. This includes rent for serviced or virtual offices, phone bills, utility bills, the cost of a new laptop, vehicles used for business purposes, and self-storage. In other words, it includes more than you are probably currently claiming as business expenses.
With the tips above, you can slim down your tax obligations and enjoy a far more manageable tax bill this year.