Tax time can be a headache for those of us ill-prepared, especially if you have no idea how to do your taxes in a way that reduces your tax liability so you end up paying less. So if you’re not sure how to reduce your tax liabilities, check out the following tips to see what steps you can take to save the most money come tax time, such as increasing your retirement savings.
How to Reduce Your Tax Liabilities: Top 7 Strategies
- See If You're Eligible for the Earned Income Tax Credit
The earned income tax credit is calculated using a formula that takes family size and income into consideration. Check if you qualify for it because it’s a refundable tax credit of up to $6,660 for the 2020 tax year and the income limits range from $15,820 for single people with no kids to $56,844 for married couples who file jointly and that have three or more children. So if you’re worried about how to reduce your tax liabilities, this is one of the best things you can do.
- Claim Business Deductions with Your Side Hustle
Everyone’s got a side hustle going these days, especially with the boom in online businesses and gigs since remote work became the new normal. If you’re one of the many people running a side hustle or business, you’re in luck because self-employed individuals (whether they work full-time or part-time) are eligible for tons of tax deductions. Just some of the deductions you can look forward to include:
- Shipping fees
- Advertising fees
- Business-related vehicle mileage
- Website fees
- Percentage of home internet charges used for business
- Business-related travel
- Office supplies
- Memberships
- Contribute More to Your Retirement Account
Maximizing your contributions to your retirement account can help you reduce the amount of taxes you owe, as long as you’re contributing to a traditional 401(k) or IRA account. An added benefit is that you can keep your funds growing tax-free until retirement. The amount you can contribute varies and depends on several factors, such as whether you or your partner is covered by a retirement plan at work and your income level. So if you’re ever wondering how to reduce your tax liabilities, putting more away for retirement is a simple way to do that.
Although many clients believe taxes may go up in the future, you have to consider the possibility that you may end up in a lower tax bracket when you retire as you control how you distribute your retirement savings. This should further encourage you to consider saving for retirement today.
- Make Donations to Charity
Tax season is a great time to do good and give back to your community. Itemizing deductions on your tax return instead of taking the standard deduction, and making contributions to qualified charities can help you reduce your tax liability. You can make either cash contributions or donate your old goods (like unused household items). So go through your old stuff and see what might be in good enough condition to donate to charities like The Salvation Army or Goodwill.
- Donate Stocks to Avoid the Capital Gains Tax
Got some stocks weighing down your portfolio? Donate them. It’ll not only make your overall portfolio perform better, but it’ll help you avoid the pesky capital gains tax you’re likely going to have to pay if you hold onto those stocks. According to the rules, you’re allowed to deduct losses on stock sales, which can help you offset the capitals gains you might’ve made during the year. But avoid doing it just for the tax break because the IRS can (and will) take back your deduction, if you, say, decide to buy back your stock within a month.
- Deduct Half of Your Self-Employment Taxes
If you’re self-employed, you can deduct half of your self-employment taxes every year. If you worked a regular job, you’d have to pay half and your employer would pay the other half. The 15.3 percent Federal Insurance Contributions Act tax is used to pay for the Social Security and Medicare Programs. As a self-employed taxpayer, you can claim up to half of your self-employment taxes to reduce your total tax liability. And you don’t even have to itemize to claim this deduction. Win-win.
- Consult Wealth Management and Tax Experts
If you’re still unsure about how to reduce your tax liabilities in the right ways after reading about the strategies above, you might feel more comfortable talking to a tax professional that can help you navigate the complicated waters that are tax planning and preparation.
Capital Growth is one of the leading wealth management firms in San Diego, here to offer advice and assistance on all things investment and finances. Our wealth management and financial advisors know all of the small print, insider tips, and proven strategies to set a solid foundation for your financial future.
We can help you with financial planning, investment management, retirement planning, tax strategies, and estate planning and conservation, among other things.
Key Takeaways
- Reducing your tax liabilities is as simple as contributing more to your retirement, checking if you're eligible for the EIC tax credit, claiming business deductions from your side hustle, donating to charity, avoiding the capital gains tax, and deducting your self-employment taxes.
- Partnering with a tax expert can help ease your fears and let you know you're moving in the right direction.
Ready to partner with a San Diego tax expert that can help you keep more of your money in the bank? Book a consultation to get started on the path to reducing your tax liability.