It’s likely that this time of year, especially if you have many income streams, your first priority is saving as much money as possible on taxes. Tax season can be challenging when managing money from a variety of sources, including a business, assets, and a job. Thankfully, there are several of strategies to optimize your tax deductions.

In this article, you will learn some tried-and-true effective methods to reduce your tax burden that every business owner with multiple streams of income should be aware of.

Understand the Different Tax Rates That Apply to Different Sources of Income

Different income streams may be subject to varying tax rates. For instance, long-term capital gains—profits from the sale of properties you’ve owned for longer than a year, such as stocks, bonds, mutual funds, and real estate—generally subject to a lower tax rate than ordinary income, which includes earnings from employment or business profits.

Depending on your total taxable income, the federal income tax rate on long-term capital gains can range from 0% to 28%. Ordinary income and short-term capital gains are subject to tax rates ranging from 10% to 37%.

When you understand the tax rates that apply to different sources of income, you can plan accordingly and maximize your tax savings. For example, you can hold onto investments for more than a year to take advantage of lower long-term capital gains tax rates or harvest losses from poor investments to offset capital gains.

Utilize Tax-Advantaged Accounts

A tax-advantaged retirement account can be a great way to reduce your taxable income. Here’s a quick overview of some of the most widely used tax-advantaged retirement accounts:

• A Traditional IRA allows you to save for retirement on a tax-deferred basis. You may be able to deduct contributions depending on your income and whether you have access to an employer-sponsored retirement plan. In addition, funds in the account can grow tax-free until you start taking withdrawals in retirement.
• Contributions to a Roth IRA aren’t tax deductible, but you can withdraw your contributions and earnings in retirement without paying taxes on the withdrawals. There are income limits for contributing to a Roth account, but if you qualify, they’re an excellent way to create tax-free income in retirement.
• A 401(k) plan allows employees to contribute pre-tax dollars to a retirement savings account. Contributions to a traditional 401(k) are tax-deductible in the year you make them, and investments within the account can grow tax-free until withdrawn.
• A SEP-IRA is a tax-advantaged retirement account that allows self-employed people and small business owners to contribute to their own or their employees’ retirement accounts. SEP-IRA contributions are tax deductible.

You can also leverage tax-advantaged accounts to save for healthcare costs. For example, if you have a high deductible health plan (HDHP), you can contribute to a Health Savings Account (HSA). Contributions to the account are tax-deductible. You can withdraw the money tax-free if you use it to pay for qualified medical expenses, such as doctor visits, prescription drugs and vision care. Any unused funds roll over from year to year.

Flexible Spending Accounts (FSAs) are tax-advantaged accounts available through employers. Like an HSA, they allow you to set aside pre-tax money for medical expenses. Contributions to a flexible spending account are tax-deductible, and you can use the funds to pay for qualified medical expenses. However, unlike an HSA, FSAs have “use it or lose it” rules, meaning unused funds in the account don’t roll over from one year to the next.

Taking advantage of various tax-advantaged accounts can help you save money and reduce your total tax liability.

Choose the Right Business Structure

Making the best business structure decision can help you save as much money as possible on taxes. Different kinds of structures could be advantageous for tax reasons, depending on the kind of business you are doing. For instance, you pay personal income taxes on your profits even though you won’t be responsible for corporation taxes if you operate a limited liability company (LLC), partnership, or sole proprietorship. However, you might be able to lower your self-employment taxes if you choose to have your LLC taxed as a S company.

The type of business you operate and your overall tax condition are two important considerations when choosing the appropriate business structure. That’s why talking over the choice with your tax expert is a smart option. We can help you run the numbers to help you make the best decision for your circumstances.

Understand Passive vs. Active Income

The difference between active and passive income is a critical distinction that can have a big impact on your tax liability. Active income comes from employment, such as wages and salaries or profits from a business you actively participate in. Passive income comes from earnings from rental properties, royalties, and companies you don’t actively participate in.

Often, clients assume that losses from a rental property or passive business will offset other types of income, but that usually isn’t the case because of passive activity loss rules. Passive activity loss rules limit your ability to shelter salaries, wages, and other income with deductions from activities in which you don’t “materially participate.”

For example, say you’re a silent investor in a startup generating losses while the company gets off the ground. You can use those losses to offset income from other passive activities, such as a rental property, but not income from your consulting business that you’re actively involved in.

If you’re considering investing in a new venture or property, it’s a good idea to discuss it with your accountant to ensure you know how it will impact your federal income taxes.

Take Advantage of All Available Tax Deductions and Credits

Tax credits and deductions can be a great tool to reduce taxable income and maximize your tax savings.

Common federal tax deductions for individuals include the standard deduction, charitable donations, medical expenses, state and local taxes, and mortgage interest. If you own a business, you can deduct ordinary and necessary business expenses. These vary depending on your industry, but some common examples include costs of goods sold, salaries and wages, advertising expenses, rent, utilities, supplies, and the home office deduction.

Read Also: Creating a Side Hustle for Extra Income

While a tax deduction lowers your taxable income, tax credits are a dollar-for-dollar reduction in the amount of tax you owe. Some common examples of tax credits for business owners include the Research & Development Credit, the Work Opportunity Tax Credit, and the new Clean Vehicle Tax Credit.

To claim these deductions and credits, be sure to track all your deductible expenses throughout the year. Keeping accurate records of expenses can help you maximize tax savings when you file your return.

Having a variety of sources of income can help you accumulate wealth and financial stability. To make sure you take advantage of all available tax deductions and other savings opportunities, tax preparation is necessary.

6 Ways to Manage Finances With Multiple Income Streams

More Americans are depending on various sources of income to cover their basic living expenses as well as to provide them with more financial security. A recent survey by Bankrate on side gigs found that 33% of side hustlers depend on their extra revenue to pay for living expenses.

Having several sources of income includes managing more bank accounts, keeping track of more cash flows, accounting for more revenue in a budget, and possibly facing additional tax liabilities. Here are some tactics for managing those obligations well.

1. Create a comprehensive budget

Having a comprehensive budget allows you to see the total amount of money you have coming in each month and where you want to distribute it. Start by listing all your income sources and their respective amounts.

Then, identify your expenses. Keep separate categories for essential expenses, such as rent, utilities and loan payments, as well as nonessential expenses like clothing and entertainment. Consider the specific needs associated with each income stream: Maybe you need to pay for equipment for a side hustle or have costs associated with managing investments.

Finally, make sure to also allocate a portion of your income for savings, including emergency savings.

2. Streamline financial accounts

One of the first steps to take for keeping your bank accounts organized is to separate business and personal finances. Maintaining separate accounts in this regard helps you keep track of income and expenses associated with each stream, avoiding potential record-keeping errors and making it easier to pinpoint business-related expenses when tax season comes around.

Still, having multiple accounts to keep track of can be daunting. You can streamline your accounts further by linking them to a personal finance app that provides a consolidated view of all your accounts.

Apps like Mint and Empower let you track earnings, expenses and savings from each account in one dashboard. Having this comprehensive overview enhances your financial decision-making and makes it easier to regularly review transactions.

3. Automate savings and payments

Managing multiple income streams can quickly become overwhelming if you have to manually allocate funds for savings, debt and bill payments. Automating your savings and payments simplifies the process of distributing your income and helps you stay on top of financial commitments.

To automate savings, you may be able to set up regularly scheduled transfers to a savings account through online or mobile banking or in a third-party savings app. Determine a specific percentage or fixed amount that you want to save from each income source, which will be deducted from your paycheck and moved into a linked savings account.

Typically you can automate your bill payments through online banking, as well. A bill pay tab in your online banking portal will ask you to enroll and enter information about billers you want to link. That could include rent or mortgage, utility bills, loan repayments and credit card payments. Automating these payments not only saves you time, but also reduces the stress of remembering and managing multiple due dates.

4. Pay attention to taxes

Each of your income sources may have different tax implications, and it’s essential to understand the specific rules and regulations that apply to each stream. If you have a side hustle, whether it’s part- or full-time, you’re considered self-employed and likely receive a year-end 1099-MISC income statement, which designates self-employment income.

When you file taxes for a side hustle, you’ll want to account for any business-related expenses, since these can lower how much you owe in taxes — you’re only taxed on profits made. Some common expense categories include:

• Supplies
• Legal and professional services
• Car/truck maintenance
• Insurance

Keep a meticulous record of all income and expenses throughout the year to simplify the tax preparation process. Make sure to have copies of receipts, invoices and financial statements.

Also consider the tax advantages of retirement accounts. If you contribute to a traditional IRA or 401(k), you’ll defer getting taxed and get a tax break for those contributions, though you’ll have to pay taxes on future withdrawals. With a Roth IRA, you pay taxes now, but your funds grow tax-free up until withdrawal.

To ensure compliance and maximize your tax efficiency, you might want to consult with a tax professional who can provide tailored advice based on your specific circumstances.

5. Use digital expense tracking

Tracking all your expenses in a spreadsheet, especially when accounting for expenses related to multiple income sources, can get tedious and messy. Luckily, technology can do much of that work for you, now.

With digital expense-tracking tools, you can categorize your expenses according to the income stream they belong to. In some cases, those expenses may even be automatically categorized. Plus, you’ll have a comprehensive record of all your expenses throughout the year, which will come in handy during tax season or simply to review your financial situation.

A number of budgeting apps, including Mint, come with expense-tracking tools. With Mint, users link their accounts to the app, and it tracks all purchases made against the accounts. It automatically groups expenses into categories, though users have the ability to customize and rename those categories.

Expensify is another popular expense-tracking service. It comes with a unique receipt-scanning feature — you simply take a picture of a receipt, and the app automatically logs the date, merchant and amount of the expense. The service comes with 25 free receipt scans for individuals — after that, it costs $4.99 per month.

6. Regularly assess and adjust financial goals

Having multiple income streams means your financial situation can change frequently. You may prioritize different income sources over time, have investments with fluctuating returns or take on sporadic gig work. As your income streams evolve, your financial goals and needs will, too.

Review your budget periodically to track your progress toward savings targets and debt reduction goals. As you analyze your income and expenses from each stream, you may find areas where you can optimize spending and invest more into higher-yielding income sources.

As an example, suppose you’re a freelancer who also earns passive income from investments. Initially, you may have to rely heavily on freelance work for income, but as your investment portfolio grows, you start generating more income from dividends and capital gains. With this shift in income streams, you may need to restructure your budget and financial goals, such as by saving a higher percentage of the freelance income and redirecting more investment income toward additional investments or long-term savings.

By recognizing and adapting to inevitable changes, you can make the most of your financial resources and continually build toward new goals.

Final Words

Multiple income streams necessitate careful planning, organization, and ongoing review in order to manage funds effectively. Digital financial management tools can help to streamline the tedious task of keeping track of your spending and managing your budget when your financial position becomes more complicated.

With several sources of income, keep in mind that your financial condition is always changing. To optimize your earning potential and reach your financial objectives, you might need to review your priorities and budget more frequently than you would with a single source of income.