It’s never easy to see a substantial piece of your paycheck getting withheld by the Internal Revenue Service. Essentially, it goes like this: the more money you make, the more the IRS will withhold. With this, it’s not uncommon to see businesses or citizens looking for answers on how to avoid income tax or even how to get out of paying taxes.
4 tax-reduction strategies
The majority of the tax burden typically falls on the shoulders of the highest earners. As complicated as the United States tax code is, its fundamental framework is pretty simple in that your tax rate gets higher as you make more money. The complex nature, though, stems from the different kinds of income as well as the tax deductions and tax credits that are available to taxpayers that do their due diligence when it comes to tax preparation.
So the questions that are often on a lot of people’s minds are: how do I pay less income tax and how to pay no taxes? Can the average American avoid tax? The answer is yes, some taxpayers — including those that have an investment income of more than $100,000 could potentially elude any tax liability.
No matter what your income or net worth is, it’s only reasonable that you take advantage of any available tax deductions and credits you are qualified for. Prudent tax planning could expressively lessen your tax burden to almost nothing even if you have a fairly high income. Here are some ways to go about it.
1. Maximize Your Tax-Deferred Savings
One great way to reduce your taxes is to put money in a tax-deferred retirement account. This hits two birds with one stone as you not only are saving money for retirement but you are also lessening your income enough for it to fall into a lower tax bracket.
And so, if your employer offers a tax-deferred program like a 401(k), you should make sure that you are participating and putting in as much money as you possibly can.
Now, if you are an entrepreneur, you also have several choices of tax-favored retirement accounts such as the Simplified Employee Pensions (SEPs) and individual 401(k)s. The contributions will slash your tax bill while earnings grow tax-deferred for your retirement. Since the contribution limits for programs like these are fairly high, these can offer you a sizable tax shelter for huge earnings, provided you have them.
2. Individual Retirement Accounts
While Individual Retirement Accounts or IRAs are an accessible way to slash your taxes in basically the same way that a 4019k) does, be aware that it has strict rules. If neither you nor your spouse is engaged in a workplace retirement plan, then you can contribute $5,500 ($6,500 if you’re 50 or older) to an IRA and take that off your taxable income.
3. Health Savings Account
You should also check if your place of work offers an insurance plan that you could use in tandem with a Health Savings Account or an HSA. If not, you can also open one on your own. An HSA allows you to place money pre-tax for a wide array of medical bills — such as deductibles and other medical expenses — that are not covered by insurance like vision and dental treatments.
An HSA also provides a very beneficial triple tax break. This is because the money you place is tax-free — no federal income taxes, no state or local taxes, and no FICA taxes. The balance also grows tax-deferred and withdrawals that are used to pay off medical bills are also tax-free.
4. Flexible Savings Account
The Flexible Savings Account or the FSA is similar to the HAS. Although it’s only available through an employer-sponsored healthcare plan, it still allows you to set money aside, pre-tax, of up to $2,550 a year, for qualified health expenses like deductibles. That’s $2,550 that the IRS won’t touch. Yes, you read that right — no federal income tax, no state tax, no FICA!
However, those funds are not directly yours and if by any chance, you don’t spend them before year’s end, they could revert to your employer. However, companies typically offer grace periods well into the next year for you to spend the money. You may even be able to roll over up to $550 into the next year’s spending window. Generally, though, you can’t use an FSA if you’re enrolled in an HSA and vice-versa.
Dealing with tax issues is never an easy matter and that’s what TFX (Taxes for Expats) is here for. If you need assistance with tax deductions, tax breaks, or any other tax-related concern, get in touch with the tax experts to make sure the right decisions will be made.
Veronica Rhodes from TFX
TFX is a women-owned tax firm that offers all U.S. tax services — for both American citizens and non-citizens with U.S. tax filing requirements. From straightforward expat tax preparation to complex cases involving multiple factors — we’ve handled it all for over 25 years.