Understanding the tax credits and deductions that you are eligible for, and calculating them correctly, can mean the difference between owing more money at tax time or receiving a welcome refund. Here are some ways followed by our tax consultants at Wharfhouse Business Services to minimize your tax liability:
- The key to minimizing your tax liability is reducing the amount of your gross income that is subject to taxes.
- Putting pre-tax dollars into a retirement plan is one easy way to reduce your taxable income for the year.
- If you sell an investment that has lost value, you can use that loss to offset other income.
Contributions to Employer-Sponsored Plans
Contributions to these plans are made through regular paycheck withholding and offer a direct dollar-for-dollar reduction to total taxable income. Another version of these plans doesn’t provide any upfront tax benefit but does allow for tax-free withdrawals later on.
If an employer sponsored plan isn’t available to you, consider a traditional IRA instead. Your contributions will be made with pre-tax dollars, resulting in a direct reduction to your taxable income for the year, and ultimately, to your total tax liability.
Profit From Investment Losses
Selling off investments that have declined in value since you purchased them can also help you reduce your tax liability for the year—a strategy often referred to as tax-loss harvesting. These investment losses can be written off against your investment gains or other income up to a certain limit each year.
What’s more, any amount you can’t use this year can be carried forward to future years, reducing your taxes then, as well. Conversely, it can be beneficial to delay selling an appreciated asset and avoid being taxed on your gain, especially in a year when your taxable income is already high.