Every year, millions of Americans prepare tax returns and send them to the IRS. It may also be necessary to file and send in state and local tax returns as well. While most people will owe taxes at the end of the year, there may be ways to keep your tax burden to a reasonable level.
Take Advantage of Tax Harvesting
Tax harvesting is the act of selling losing stocks just before the end of the year. By locking in your loss, you may be able to reduce your taxable income for the prior 12 months. In most cases, you can deduct up to $3,000 in capital losses in a single year. Any excess losses can be carried into future tax years. It is also important to note that you may not be able to purchase the stock again for 30 days if you are going to record the loss for tax purposes.
Contribute to a Retirement Account
In 2017, you can contribute up to $17,000 to a 401k and up to $5,500 to an IRA. Those amounts increase to $23,000 and $6,500 if you are over the age of 50. If you have a pre-tax account, the money that you contribute will be deducted from your taxable income for the year. It may also be possible to qualify for a retirement savings credit, which allows you to take a deduction based on your income and the amount of your contribution.
Defer Your Next Paycheck If Possible
If you are worried about being in a higher tax bracket this year, it may be possible to have your next check deferred until next year. For instance, if you were going to be paid $10,000 in December, you may ask to receive $5,000 in December and the other $5,000 in January. It is important to note that the IRS has specific rules as to how you must account for your income, and deferrals may not work in all situations. It would be wise to talk with your tax adviser before making any decisions about deferring income.
Take Deductions on Self-Employment Income
If you are self-employed, it may be possible to deduct any ordinary and necessary expenses from your taxable income. Examples of expenses include the use of part of your home as an office, a second cell phone for business purposes or lease payments on a business vehicle. It may also be possible to take deductions for health insurance premiums, contributions to a self-employed retirement account or payroll expenses. Talking to a company, such as the Wealth Management Company, may make it easier to maximize deductions and help grow whatever is left over.
There is no reason to pay more in taxes than absolutely necessary in a given year. While tax evasion is illegal and highly discouraged, tax avoidance can help you save money without running afoul of the law. If necessary, talk with a financial adviser who may be able to help you minimize your tax burden and keep more of your hard-earned money.