When it comes to money, we all want to keep as much of it as possible. However, there are scenarios in which being tax savvy is even more important than just saving 50 or 60% (depending on where you reside). In fact, in some situations, you could end up owing the government thousands of dollars more than you initially earned. Let’s look at these five tax-saving strategies.
Invest in Municipal Bonds
Shares of a publicly held corporation represent partial ownership in that company, and along with dividends, are a common source of taxable income. In contrast, municipal bonds represent a tax-free loan to a state or local governmental entity and therefore are free of federal tax. These instruments are issued by state and local governments to finance public projects like highway construction. Investors who buy municipal bonds receive interest on the bond. Interest from a municipal bond may also be exempt from state or local taxes, depending on where you live.
Consider Long-Term Capital Gains
Investing can be a vital tool for growing wealth. An additional benefit from investing in stocks, mutual funds, bonds, and real estate is that the favorable tax treatment for long-term capital gains can reduce your overall tax bill. Depending on your income level, you may be taxed at 0%, 15%, or 20% on the capital gain.
Starting a Side Gig
Your side business can provide a lot of great tax breaks. As long as you’re careful to meet certain requirements, many of your expenses can be written off, which reduces your total tax obligation. Health insurance premiums are especially valuable for self-employed individuals.
Employee Benefits and Max out Retirement Accounts
If you are eligible for an individual retirement account deduction, you will get a break on your taxes, but the deduction phases out at different levels if you file a joint return or claim it on your own return. The IRS has a list of detailed rules about eligibility—and how much you can deduct.
Using a Health Savings Account
Employees who have a high-deductible health insurance plan can save money on taxes by using a health savings account. Contribution to these accounts is made before taxes are taken out. These contributions are 100% tax-deductible. You can use your HSA to grow your savings tax-free and withdraw money from the account for qualified medical expenses without paying tax.