The more money you make the more taxes you will pay! Generally an unexpected tax bill can probably ruin everyone’s day. Therefore to avoid those unnecessary surprises, it is often important to make smart moves and help reduce your tax bills. Since the United States tax laws are coded in such a manner that high-earners pay high-tax rates, the ultra-wealthy people often take advantage of the law to cut down their tax rates.
While there are many different and creative ways to reduce the amount of tax you pay, there are few outstanding tax strategies on the radar that can help cut the taxes without making any extra efforts. This article has itemized some of the important strategies that can help reduce the standard deductions.
Tax Minimization Strategies – To Slash Tax Rates
Use Retirement Savings Plans To Reduce Higher Taxes
When you have less taxable income then obviously you will pay lesser tax. When you are a member of a pension’s plan, you can easily achieve this because each time you are paid, your employer withholds the money for the federal income taxes. This in turn invariably dependent on expected taxable income. In fact, 401(K) is one of the most popular ways to reduce tax bills. With 401K you may lower the tax bills and build great financial security.
Form W-4 And Take Home Pay
W-4 is basically a tax form that you complete and give it to the employer. Individuals often have a confusion of W-4 with IRS but W-4 has the greatest potential to adjust your tax withholdings sometimes even with $0 return. Under the new tax law, the more allowances you claim, the less federal income your employer will withhold. Generally claiming 1 allowance is wise because you will have only a minimum tax withheld from your paycheck. Especially when your filing status is single or unmarried, it is perhaps the safest choice.
The charitable donation deduction allows an individual to reduce their taxable income for donations or gifts to qualified, tax-exempt organizations. When you file your income tax return, you can report your charitable donations and claim your tax credits. However, the donations you make should be eligible for tax credits. The US and Canada have generous tax credit systems for donors to charities. In fact, individuals may deduct cash and other contributions up to 60% of the adjusted gross income. In a nutshell, the taxable income of the donor is reduced by $300.
Making Savings In The IRA
Making contributions to the IRA is perhaps an excellent way to cut down your tax bills. You can defer paying income tax up to $5,500 when you contribute to an IRA.
There are two major types of individual retirement accounts, Roth IRAs and Traditional IRAs. Contributions in both these categories can deduct your tax rates by a considerable margin. For instance, if you are in the 25 percent tax bracket and you are making a deductible IRA contribution of around $5000 -6000 then you can save around 1300 – 1400 dollars in taxes just for the first year. Making successive contributions in the future will help you save thousands of dollars in taxes.
Funding Your Flexible Spending Account (FSA)
Unlike Health Savings Accounts or Archer Medical Savings Accounts which usually require reporting in the form 1040, FSA doesn’t require any form of reporting in the income tax return. The contributions you make to the flexible spending account though not tax deductibles but still, reduce your taxable wages. Generally, the money used to fund FSA is pretax meaning the funds are deducted from your salary before the taxes are deducted.
Ultimately you are saving a percentage of money that you actually need to pay to the federal tax. When you pay a sum of $2000 after signing the FSA account you can enjoy benefits up to $600 if your tax bracket is 30%. FSA can maximize your savings potential
In addition to this, you can also make use of defined benefit plans, simple IRA that could be cheaper and more effective to save and reduce your tax bills. Similarly, if you planning to make a charitable donation, offer shares to a public company because you will be equally benefitted with it.