Follow These 5 Strategies To Reduce Your Tax Liability

American tax code can be complicated, but the basic context is simple. The more you take home, the higher your tax rate.

Is it possible for an average American to reduce their taxable income and pay little to no taxes?

Indeed.

Various tax deductions, credits, and investment strategies can significantly reduce your tax liability to almost nothing, even if you make $100,000 or more annually.

Here are 5 ways to pay less taxes in the US!  

Make the most of your retirement accounts

One of the easiest ways to reduce your taxable income is to max out pre-tax retirements accounts, such as company-sponsored 401(k) or traditional IRAs. In 2022, the maximum that you can contribute to 401(k) is $20,500, while those aged 50 or above can add another $6500 to their contribution.

If you are self-employed and don’t have a workplace retirement plan, you can reduce your liability by contributing up to $6000 to an Individual retirement account (IRA), with an additional $1000 exemption available to those 50 and above.

Try to fund the IRA as early as possible in a financial year to get the most tax-deferred earnings possible.

Take advantage of Health Saving Accounts

Taxpayers with a high-deductible health plan (HDHP) can get a triple tax advantage with the HSAs. You can contribute to this medical savings account without paying any taxes. There’s no liability if you utilize the funds for qualifying medical expenses, such as laboratory tests, dental services, hospital services, and OTC medicines. 

Even if you don’t use all the money in your account, it will continue earning tax-free interest. The balance is carried over from one year to another. Once you turn 65 and still have some fuel in the tank,  you are free to withdraw from your HSA without any penalty charges.

Check with your employer if they sponsor an HSA plan. If not, get one for yourself. In either case, you can contribute up to $3650 annually as an individual and $7300 for a family. Those aged 55 and above can add another $1000 to the cause. 

Start a side business

If you start a small business besides your primary source of income, it can save you thousands of dollars in taxes. Many expenses such as transportation, housing, setup cost, utilities, and insurance premiums can be deducted from your income.

The IRS allows you to deduct up to $5000 in startup costs and $5000 in organizational costs from your taxes a year before you plan to start a company. You must showcase your business as ongoing trade and not a hobby because the latter is not accounted for tax deductions. There has never been a better time than this to start a side hustle, as the American government is looking to boost the US economy.

Stay invested in the market

Long-term capital gains are taxed differently than short-term capital gains. Most people are aware of this and yet give in to the urge to time the market. If you hold stocks, bonds, or mutual funds for less than a year, your capital gain will be taxed at normal income slab rates. The equation changes with long-term investing, as you enjoy a preferential tax rate of 0%, 15%, or 20% on the basis of your taxable income and filing status.

In 2022, if your total taxable income is $41,675 or below, you don’t have to worry about capital gains tax. However, if it’s in the range of  $41,676 to $459,750, you will be liable to pay 15%. And anything above that will attract a tax rate of 20%.

If you are filing jointly as a couple with a combined taxable income below $83,350, you don’t have to pay a penny on capital gains. However, the rate jumps to 15% if taxable income ranges between $83,351 to $517,200.

Participate in charitable giving

What better way than this to reduce some of your tax burdens? The only condition here is that the receiving organization must be eligible for tax-exempt status, as determined by the IRS. You may be eligible to take a deduction for cash contributions up to $600. If you itemize your deduction at the time of filing your taxes, you can deduct up to 50% of AGI (Adjusted Gross Income) through charitable donations. However, this may vary depending on what you are contributing and the type of organization receiving it.

Bottom line

It is important to pay taxes on time, but you don’t have to pay extra if you qualify for deductions and credits. The above information is enough to get started, but if you want to dig deep, spend some time on the IRS website. With proper tax planning, you can save hundreds and thousands of dollars in taxes.


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