How to Legally Minimize Your Tax Bill – Insider Tips From Experts
No matter your tax filing strategy or goals, proper documentation is of utmost importance. A great starting point would be completing your year-end accounting to understand more clearly your annual income and expenses.
Credits reduce your tax bill while deductions reduce income; taking advantage of complex rules to legally minimize tax costs is sensible; hiding or exaggerating deductions should not.
1. Understand Your Tax Situation
Understanding how the IRS taxes you is key to lowering your tax bill. For instance, investing in tax-deferred retirement accounts or taking advantage of charitable donation deductions could lower your taxable income and thus reduce your taxable income tax bill.
If you are considered a high-income earner, there are additional strategies you can employ to lower your tax liability. One method involves shifting income away from you into lower tax brackets through children or even business structure strategies like creating an LLC or S-corp instead of C-corp to decrease tax liabilities.
Notably, while strategic tax planning and reducing your taxable income make sense, engaging in any form of tax evasion or avoidance is illegal and should be avoided at all costs. According to the Internal Revenue Service’s definition, avoidance is defined as structuring transactions so as to reduce their effect; while planning is conducted within legal parameters to decrease liability and maximize after-tax returns.
2. Know Your Deductions
Tax planning can be complex, but there are strategies and rules that make sense to help keep tax planning straightforward. Ignoring laws to conceal income or deductions illegal and may result in an IRS audit.
The IRS offers two forms of tax incentives, deductions and credits. Deductions reduce your taxable income by deducting certain expenses from gross income; examples include mortgage interest payments and retirement account contributions. Deductions encourage home ownership and saving; which the government considers essential components to economic health.
Other deductions you should consider including donating cash, items and appreciated stocks to qualifying charities as well as tracking mileage for business use. Most deductions only make sense if itemized; keeping more detailed records during the year and filing more paperwork are essential in this endeavor. A professional tax preparer can assist in choosing which method best fits your situation.
3. Take Advantage of Tax Credits
Tax deductions reduce taxable income while tax credits directly reduce actual taxes owed – making tax credits far more advantageous than their counterpart, deductions.
Attaining tax credits that you qualify for is the key to reducing your taxes, and can be accomplished using tax software programs or consulting with knowledgeable tax professionals. Tax credits may be either fully, partially, or nonrefundable refundable with various eligibility criteria that must be fulfilled to claim them.
Investing in a tax-friendly retirement plan or individual retirement account is another excellent way to reduce taxes, as is making charitable donations; cash, property, household goods and appreciated stocks all can help lower your tax bill if donated to qualifying charities; these deductions can only be claimed with itemized deductions.
4. Don’t Forget About State Taxes
Most states offer tax agencies and ombudsmen that can explain your rights as a taxpayer and help address your problems or complaints. To be accurate in reporting income on state returns, it is crucial that you keep detailed and accurate records of everything that comes in throughout the year.
Normal practice dictates that your state tax bill will exceed that of the federal one due to payroll withholding payments made throughout the year that contribute towards prepaying some state taxes.
Filing your return, you can claim tax credits and deductions to reduce what you owe. While paying state taxes on time is ideal, if you miss an installment payment plan may help prevent penalties and interest from piling up – something Optima Tax Relief has extensive experience helping taxpayers do.
