If you’re making money, you’re going to have to pay taxes. Your income is taxed at federal, state and local levels. On top of this, any earned income is also subject to additional levies to fund things like Social Security and Medicare. While it’s important that you do pay your taxes, there are methods you can use to protect your income. Here are six ways to protect your income from taxes.
1. Look Into Municipal Bonds
Few people know what municipal bonds are, but by investing in them, you can manage your tax more effectively. A municipal bond is when you lend money to a state or local governmental entity in return for a set number of interest payments over a predetermined period. When your bond reaches its maturity date, the full amount of your original investment will also be repaid. Believe it or not, the Interest that you gain on your municipal bonds is exempt from federal taxes and may be tax exempt at the state and local level as well. On top of this, municipal bonds generally have lower default rates than corporate bonds. Of course, municipalities pay lower interest rates than corporate bonds, but they have an equivalent yield thanks to the tax benefits that come hand in hand with them.
2. Make the Most of Retirement Accounts and Employee Benefits
Taxable income can be reduced when you make contributions worth up to $19,500 in a 401k or 403b plan. This can significantly reduce your taxable income and you gain the money back in the future. This is a simple and straightforward way to get a tax break. This deduction is phased out for gross incomes at different levels. You may need to consider whether you are filing on a single return, a joint return or another way. Some employers will also offer a number of fringe plans that allow you to exclude your income contributions made or benefits received under their plans. These are generally reflected as non-taxable amounts in your W-2 statements.
Claim Tax Credits
A number of IRS tax credits can help to reduce your taxes. Low income taxpayers can claim credits up to $6,600 with free children. So, look into your local area and whether you can claim this. Different rates will be eligible for different circumstances, but each can really help. Some help can also be claimed if you are a student. Look into the American Opportunity Tax Credit for further information on this. For moderate to lower income households, there is also the option of Saver’s Credit.
As you can see, being savvy with your taxes and coming up with a strategy can really help you to minimize your taxes. All you need to do is make the right decisions and get the right advice! Hopefully, some of the simple tactics outlined above can help you to come up with a tax strategy that really works for you and your individual needs and circumstances.