5 Strategies to Protect Income from Taxes

Every year, millions of Americans feel overwhelmed by seeing a significant portion of their hard-earned income disappear into the tax abyss.

An individual’s income can be subject to different tax liabilities. In such a scenario, a person can look for ways to minimize tax liability, and this is where this blog can be helpful for you.

Whether you are an investor, business owner, white-collar worker, or a young adult, here we’ll provide technical information on tax-efficient investing and methods to optimize your tax strategy to reduce tax liabilities.

How to Reduce Your Tax Liability and Save More of Your Income

There are several ways in which you can reduce your tax liability, let’s have a look.

1.   Investing In a Retirement Plan

One way to reduce your tax charges is to lower your taxable income. You can do this by investing a certain amount of your pre-tax income in a retirement plan like a 401k plan or traditional IRA. Here is how much you can invest in your 401k plan and traditional IRA:

●     The limit for investing in your 401k plan has increased to $20,500 in 2023. In your traditional IRA, you can invest $6,000. 

●     People over 50 can add an extra $7,500 to their employer-sponsored 401k plan and $1,000 to their traditional IRA. 

One of the best parts about investing in your retirement plan, in a 401k plan or traditional IRA, is that you immediately get a tax break. It is a perfect win-win situation, helping you reduce your taxable income and save up money for your retirement.

2.   Contributing to HSA

Another approach you can adopt to reduce your tax liability is to invest your pre-tax income in an HSA (Health Savings Account). Investing in a Health Savings Account (HSA) offers several tax benefits. Firstly, contributions made to an HSA are tax-deductible, meaning that the amount contributed is deductible from your taxable income. This can result in a lower tax bill.

Secondly, the funds within the HSA can grow tax-free through investment earnings. Lastly, withdrawals from the HSA for qualified medical expenses are tax-free. Overall, investing in an HSA can provide a triple tax advantage, making it a valuable tool for reducing tax liability and saving for healthcare expenses.

As of 2023, the amount you can invest in your HSA is as follows:

●     Individuals can invest up to $3,850 in their HSA Account.

●     In a family account, the contribution can be increased up to $7,750.

●     People aged over 50 can invest an additional $1,000 in their account.

Also, one thing that you should note is that if your employer doesn’t provide HSA, then you can start this account through a bank or financial institution.

3.   Saving is a 529 Plan

A 529 plan is very useful, especially for parents who want to allocate funds for their children’s education. As the contribution amount in a 529 plan is tax-free, it eventually offers many benefits.

There are several tax benefits of investing in a 529 plan such as the tax-free nature of your savings. Withdrawals for college expenses like tuition fees, room accommodation charges, and others would also be treated as tax-free deductibles.

For parents and to-be parents, a 529 plan is among the best ways to save up for their children’s education and write off significant tax liabilities. However, if you are planning to invest in a 529 Plan, we recommend you consult a tax professional. In some cases, this sort of investment can be subject to the gift tax.

4.   Using 1031 Exchange

If you are a real estate investor, a 1031 Exchange could be very advantageous for you in gaining an immediate tax break. A 1031 Exchange is a like-kind exchange. A tax-deferral strategy allows an investor to sell a property and reinvest the proceeds in a new property of a similar kind, thereby deferring the capital gains taxes that would usually be due upon sale.

There are a few things that you should note if you are planning to use a 1031 Exchange. There are strict rules that apply to it. If you do not comply with them, you might lose the tax deferral benefit. Henceforth, consultation from an expert tax filer is necessary. Also, the longer you hold the asset, the more delay can be made to tax deferral on capital gains.   

5.   Claiming Home Office Deduction

Home office deductions are a great way to reduce taxes by making early deductions from your pre-tax income, but only certain people can qualify. For instance, if you are self-employed, individuals such as a freelancer, contractor, or business owner, you can gain tax breaks from home office deductions, regardless of whether you’re a homeowner or tenant.

The eligibility criteria for a home office deduction only apply to individuals who regularly conduct business activities from their homes. Furthermore, you should also have a dedicated space in your home to conduct your business activity, which would eventually determine how much tax break you can earn.

●     The set metrics for tax deduction depend on the flooring space where an individual conducts business. For every square foot, $5 can be deducted from the pre-tax income.

●     A maximum of $1,500 can be deducted from pre-tax income for 300 square feet.

Conclusion

We have now covered several strategies for saving income from taxes. Moreover, we recommend you consult a tax filing expert before adopting these strategies. But if you don’t have immediate access or are looking for a tax filing consultant to help you lower your tax-deductible, we have the right agency for you: SMB Services.

SMB Services is a reliable agency that provides professional tax services. Their comprehensive tax services include tax planning, audit support, filing & compliance, tax accounting, and more. Their assistance can help you reduce your tax burden while adhering to rules and regulations. So, opt for their services at most affordable rates and save more income by filing tax smartly.