Reducing taxable income is a goal many taxpayers pursue avidly. With a variety of legal avenues available, individuals can take strategic steps to pay less to the taxman. From retirement savings to investing in education, the opportunities abound. Below, we detail 15 strategies based on the current law, providing avenues for potential tax relief.
1. Contribute to a Retirement Account
Retirement account contributions can save taxes. These include traditional 401(k)s and IRAs. Contributions to these accounts are tax-deductible. They reduce federal tax. Money in the accounts grows tax-free until retirement.
There are Roth IRA accounts as well. They use after-tax dollars. Roth IRAs don't offer a tax deduction on contributions. But withdrawals are tax-free in retirement.
Workplace 401(k) contributions must be made by year's end. Contributions to traditional IRAs are permissible until the tax filing deadline.
2. Open a Health Savings Account
High-deductible medical plan holders can use health savings accounts (HSAs). HSAs reduce taxable income. Contributions are tax-deductible. The money grows tax-deferred. Withdrawals for qualified medical expenses are tax-free.
Unused HSA balances carry over from year to year. They operate like retirement accounts.
For people without high-deductible plans, FSAs are available. These accounts fund health and dependent care with pre-tax dollars. But there are deposit limits and potential end-of-year forfeitures.
4. Use Your Side Hustle to Claim Business Deductions
Self-employed individuals can claim many tax deductions. These are available for both full-timers and part-timers. They can target freelance projects and ride-share drivers.
Deductible business expenses include vehicle mileage, shipping, advertising, and website fees. Home internet charges, professional subscriptions, dues, and membership fees are deductible, too. Deductions are available for travel, office supplies, and business expenses. Premiums for health, dental, or long-term care insurance may be deductible.
5. Claim a Home Office Deduction
The home office deduction is for those working from home. It is also for individuals with a side business. The stipulation is a dedicated use of space for the business. A part of home expenses relative to office size is deductible.
Shared spaces typically do not qualify for this deduction.
6. Rent Out Your Home for Business Meetings
The Augusta Rule allows renting a home for business. Homeowners can do this for up to 14 days annually. The income from this rental need not be reported to the IRS. The rental mustn't occur in the owner's primary place of business.
The rent expense is deductible as a business expense. Rental income is not taxed.
7. Write Off Business Travel Expenses While on Vacation
Business and vacation travel expenses can be blended. Business expenditures can be deducted. This may include a part of the airfare and hotel bills. The deductions are in proportion to the business time spent. Professional advice is advised to avoid IRS disputes.
8. Accelerate Depreciation for Business Purchases
Businesses can deduct property purchases through depreciation. For 2023, businesses can deduct 80% of the cost of certain purchases. The rest can be depreciated over several years.
This is known as bonus depreciation. The bonus percentage decreases annually until 2026 when it ends.
9. Move Some Business Compensation from Wages to Distributions
S corporation owners can reduce taxes. They can change wages to owner distributions. Owner distributions do not attract payroll taxes like a salary.
A mix of compensation is necessary. Distributions taken should not fall under what would be a reasonable salary.
10. Deduct Half of Your Self-Employment Taxes
The self-employed can deduct 50% of their FICA tax. This tax funds Social Security and Medicare. The government offsets the burden for self-employed individuals with this deduction.
11. Get a Credit for Higher Education
Tax credits for higher education are available. The American Opportunity Tax Credit offers $2,500 per student per year. It is a direct deduction from the tax bill.
The lifetime learning credit offers $2,000 per year. It covers continuing education and job training.
12. Deduct Student Loan Interest
You can deduct student loan interest from taxes. This deduction applies even if you have completed your education.
13. Use a 529 Plan for Education Savings
Open a 529 plan for college savings. There is no federal tax break for contributions. Some states provide deductions for 529 contributions.
Withdrawals for education from 529 plans are tax-exempt. Funds can also be used for student loans up to $10,000.
14. Convert 529 Savings to a Roth Account
Beginning in 2024, under the Secure Act 2.0, 529 savers can move funds to a Roth account. The limit is $35,000. It is a one-time option per beneficiary.
15. Earn an Income Tax Credit
The earned income tax credit provides relief. For tax year 2023, it is up to $7,430. The credit is refundable.
These strategies offer diverse ways to minimize taxable income legally. They cater to individuals and business owners alike. Each has specific rules and limits. Professional advice is often beneficial.
