Taxes play a critical role in a modern society. Without them, there wouldn’t be any money to pay for the creation and maintenance of public services. On the downside, no one really wants to have their hard-earned income slashed. Yet, not paying taxes can get you into serious trouble. The best solution is to find a way to pay the lowest amount possible without getting into trouble with the IRS. Thankfully, there are plenty of ways to achieve that and below are a few of them.
If you work in a company that offers a 401(k) account, then take advantage of it. The money you put into the 401(k) account is usually pre-tax income. By maximizing the money you put into your 401(k), you are effectively lowering your taxable income.
If you are not in a position to take advantage of a 401(k), there's another medium you can tap. We are talking about the Individual Retirement Account or an IRA. Any brokerage firm or bank can help you set up such account for no or low fees. Just like a 401(k), any money you put into the Individual Retirement Account is fully tax deductible.
Keep in mind that there are two kinds of IRA: the traditional and the Roth IRA. Generally, if your goal is to lower your taxable income, the traditional IRA is the best one. However, you should consult with a professional as your situation may be unique.
If you opted for a high-deductible health insurance plan, then there is a good chance that you may be eligible for HSA. HSA is a taxpayer's friend as the contributions that go into it are tax-free. For the year 2017, the annual limit is $3,400 if you are on an individual health insurance plan. For individuals who own a family plan, then the limit is $6,750.
Paying the right kind of interest can help you reduce your taxable income. Usually, this includes business debt interest, investment debt interest, student loan interest, and mortgage interest. However, there is one caveat to this tactic - you have to itemize.
If you have a lot of itemized deductions which may result in a significant claim, then the extra effort of itemization is probably something you must do if you want to lower your taxes.
Take note that this tactic is a compliment to the itemization tactic. Not everyone can benefit from itemizing. Some of the claims are so small that they are not worth the hassle. However, if you are on the borderline between "itemizing makes sense" and "itemizing makes no sense," then paying the right kind of tax can help you push through the "make sense" category. Local, state and real estate taxes qualify as a deduction because of itemizing. Hence, paying these taxes can help reduce your taxable income. Keep in mind that in most cases, you can only deduct either state tax or income tax, not both. Generally, income tax is the best option for deductions. However, if you reside in an area with no or low-income tax then choosing sales tax as your deduction would be the best route.