Your income is taxed at the state, federal, and local levels. Although these taxes are hard to avoid, there are many strategies to help reduce their burden. Here are some ways to protect your income from taxes.
Invest in Municipal Bonds
Buying a municipal bond means lending money to a state or local governmental entity for a fixed period of time. Once the bond reaches the maturity date, the original investment amount is paid. Interests received on municipal bonds are excluded from federal, state, and local level taxes, depending on where you live. These tax-free payments make municipal bonds great for investors. Municipal bonds have lower default rates as compared to corporate bonds. So it’s safe to invest.
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Aim for Long-Term Capital Gains
Investing is an essential tool in growing your wealth. A practical benefit of investing in mutual funds, stocks, bonds, and real estate is the convenient tax treatment for long-term capital gains. Based on their income level, investors holding a capital asset for over one year enjoy a tax rate of 0%, 15%, or 20%. If the investor keeps the asset for less than a year, the capital gain is taxed at ordinary rates. A taxpayer and investment advisor can determine when and how to sell appreciated or depreciated funds to minimize gains and maximize losses.
Start a Business
Besides creating additional income, a side business offers plenty of tax advantages. In the course of business, many expenses could be deducted from your income, reducing your total tax obligation. Tax deductions for health insurance premiums are also available for self-employed individuals. Business owners can also cut parts of their home expenses while paying taxes with home office deductions. Utilities and internet service used for business can be deducted from income too.
Max out Your Retirement Accounts and Employee Benefits
Taxable income can be cut for contributions up to $20,500 in a 403(b) or 401(k) plan. Those fifty or older can add $6,500 to their workplace retirement plan contribution. For people without a retirement plan, tax breaks can be accessed by contributing up to $6,000 to a traditional individual retirement account.
