The Best Tax Reduction Strategies

Taxes are unavoidable. They are the price we pay for living in a civilized society. Taxes are necessary because they help to pay for all the services that our society needs. There are many ways of reducing taxes which can save you money, time and stress. The best way is to have a plan before your taxes are due. This includes finding out how much you owe, if any deductions apply, and what tax reduction strategies work best for your personal situation.

In this article I share some of my tax reduction strategies that I have given to my clients who have successfully used them to reduce taxes owed.

Know your tax rate:

It’s important to know your tax rates before you start with any tax reduction strategies so that you will have an idea of what your goal is in the long run.

Find Out How Much You Owe:

Find out how much you owe by checking your last two years of tax returns and W-2s. It is also important that these documents be organized properly because it can affect deductions and credits that may be applicable for the upcoming year’s return.

Check for Deductions:

Tax deductions are payments that can be subtracted from your taxable income, which means less money owed in taxes. There are many different types of deductions available, including standard deductions for everyone who files taxes (based on age), personal exemptions for yourself and your dependents, moving expenses, alimony payments made to a former spouse or partner, and student loan interest paid during the year.

You should also be aware of certain tax exemptions that can be applied to your income such as charitable donations, medical expenses, and contributions to US savings bonds.

Tax credits:

Tax credits are often misunderstood by many people. They are often confused with deductions, but tax credits lower your total tax liability.

Tax credits will have a bigger impact on you if you owe less in taxes to begin with. This is because tax credits reduce the total amount of taxes that you owe, not the amount of money withheld from your paycheck throughout the year.

Tax credits help low-income earners make more money without making any other changes to their paychecks or finances. In order to qualify for tax credits, a taxpayer does not have to make any changes to their earnings or withholdings, which makes them a more straightforward form of assistance for people who may be unable to afford a raise in income.

Investment tax breaks:

Tax exempt investments and tax advantaged accounts are some of the most effective ways to reduce your tax burden. These types of investments offer various tax benefits and incentives that can help you save on taxes and grow your wealth.

The best way to lower your tax burden is to make use of all these types of investments. For example, if you invest in a Roth IRA, you will have the opportunity to withdraw from it without paying any taxes on the associated earnings. And so long as you don't exceed the maximum withdrawal limits, this type of account can provide a significant amount of savings for you when it comes time to file your taxes.

Another way to reduce taxes is by timing capital gains correctly. Capital gains are profits from selling an asset, such as stocks or real estate, for more than its purchase price.

The taxes levied on capital gains vary, depending on how long you hold the asset prior to selling, with “short-term” taxes applying to assets held for less than a year and “long-term” taxes applying to assets held for a year or more. Typically, long-term taxes have a lower rate (the government does this to encourage long-term investment), so it's often in your best interest to carefully choose your investments and hold on to them

Tax Free Accounts:

Tax-free accounts are managed by investing in income producing financial assets. Income producing investments are not subject to taxation on their earnings. This means that you can earn interest, dividends, and capital gains without worrying about paying taxes on them.

These tax-free accounts can be advantageous if you want to save for retirement or your child’s education as withdrawals from these accounts are not taxed at all. However, those who withdraw from these accounts before age 55 will have taxes withheld from their withdrawal at the highest marginal rate. Furthermore, those who withdraw from these accounts before age 71 will also have a substantial penalty fee applied on top of their taxes withheld.

Tax deferral: 

Tax deferral is the reduction in taxes payable by a business in a particular year, by delaying when the taxes are paid. Taxes can be deferred for one or more years, and may then be paid in installments.

The tax deferral strategy is useful when net income in a current year is expected to be lower than current tax rates for that year.

For example, if you have an RRSP account , when filing taxes in April, you can choose to "defer" paying tax on your investments until later years when it could be taxed at lower rates. The downside of this method is that when filing taxes in late years, you may end up with minimal taxable incomes and thus incurring higher tax rates than before.

Tax regulations

You’ll also want to review your state, local, and federal tax codes before you formulate or alter your strategy. Regulations can and often do vary from year to year, so it’s essential to keep yourself informed.

Although paying taxes is inevitable, by utilizing these and many other tax reduction strategies you can greatly reduce your tax burden. When it comes to calculating taxes and reducing the amount of taxes you owe, it can be complicated. I encourage you to get tax planning advice from a tax mitigation specialist who can help you create a customized strategy that is specific to your situation to maximize deductions and minimize taxes due. I am here for you to answer any questions you might have. Book a call with me today.

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