5 Tax-Saving Strategies to Reduce Your Tax Burden

May 5

It’s easy to hate taxes, but most people would happily pay thousands less in exchange for doing the same work that earns them a certain amount of money. That’s exactly what effective tax strategies can do to your annual tax bill.

Let's look at some of the most common tax reduction strategies to see how you can lower your taxes right away.

1. Max Out Your Retirement Contributions

It is critical that you contribute as much as possible to your company's retirement plan up to the maximum your employer will match. Employer contributions are tax-deferred, which means that your contributions are not taxed until you withdraw them when you reach 60.

In addition, your contributions to your retirement plan may be deducted from your taxes. So if you max out your contributions to your employer’s retirement plan, you will save a lot of money.

The best way to figure out how much you can contribute to your employer’s plan is to look at the company’s plan materials, or talk to your benefits administrator.

2. Buy Tax-Exempt Bonds

You can also invest in tax-exempt bonds, which are government bonds that do not pay out federal income tax. Many states and cities also offer tax-free bonds.

For example, you can invest through an IRA or a Roth IRA in state or municipal bonds. These are typically very safe investments that pay out a decent amount of interest.

If you want to diversify your portfolio, consider investing in these tax-free bonds.

3. Make the Most of Your Home Office Deduction

If you work from home, you can claim deductions for your home office.

To claim this deduction, you will need to submit a detailed description to your tax preparer. Don't let this intimidate you, though. You can figure out if you're eligible for this deduction simply by looking at your computer, phone, and other equipment that you use every day.

Make sure to save your receipts and log how much time you spend working from home. Then ask your tax preparer if you qualify for this deduction.

4. Utilize Flexible Spending Plans

If your employer happens to be offering a flexible spending account, take advantage of it. You can use this account to pay for items such as daycare, dependent care, and medical expenses.

These accounts allow you to set aside a certain amount of money before taxes are taken out of your paycheck to pay for these expenses. Every dollar you contribute to this account is just like sending that dollar shopping.

5. Leverage Losses from Investments

If you invest in stocks and lose money, don't despair. You can use these losses to lower your taxes.

For example, let's say you invest $1,000 in stock, and later, it drops to $800. If you sell that stock, you can claim a loss of $200.

You can use that same principle to offset any income you may have earned throughout the year. This is most effective if you are in a high tax bracket and invest in risky stocks.

Conclusion

Taxes may be unavoidable, but you can spend more of your money each month and enjoy the lifestyle you want if you pay less in taxes. The key is to seek out every potential deduction and tax break available. The five strategies listed above are strategies that will help you lower your taxes and increase your take-home pay.

If you want to maximize your finances and reduce your tax burden, you're going to need a partner to guide you along the way. That's what TotTax is here for! We help business owners and professionals solve tax and accounting problems by leveraging our industry experience. We'll be more than happy to provide professional accounting and tax services whenever you need them. Contact us today to get started!