Managing your tax is an important area that you need to learn if you want to handle your personal finances well. Taxes shouldn’t be something you only think about at the end of the year, or as you prepare your return in the spring. It’s an ongoing, year-round process that requires thoughtful planning to identify and capitalize on opportunities for tax-efficiency.
Income is taxed at the federal, state, and local levels, and earned income is subject to additional levies to fund Social Security and Medicare, to name a few. Taxes are difficult to avoid, but there are many strategies to help ward them off.
How Can I Manage my Tax Increase?
What Are The Possible Ways to Decrease The Amount of Tax?
How do You Manage Taxes?
How do I Manage Sales tax in QuickBooks?
How do You Manage Black Tax?
How do You Deal With High Taxes?
What is The Tax Management?
Why Should we Reduce Taxes?
How Can High Earners Reduce Taxable Income?
How do Billionaires Not Pay Taxes?
How Can I Avoid Tax Illegally?
What Are Tax Planning Strategies?
How Does Increasing Taxes Help The Economy?
What Are The Pros And Cons of Taxes?
What Happens When Taxes Increase?
Is Tax Good or Bad?
How Can I Reduce my Taxable Income in 2022?
Do Donations Reduce Taxable Income?
How Can I Manage my Tax Increase?
Whether the government increases taxes or you move into a higher tax bracket, the tips listed in this article will help you to manage your taxes effectively.
Acquire the right knowledge
The first thing you need to do to manage tax increase or your present one is to be knowledgeable. You must understand that taxes are in different categories. Generally, they are classified as income, local, state and federal. They are also drawn from sources such as inheritance and estate, wages, investments as well as gifts and settlements.
You have to know what your deductions are and where they are coming from. Use the internet to search for relevant sites to obtain more information or get a consultant to explain some things that are not clear to you.
Keep relevant documents
You need to be able to trace every transaction. For you to do this, every receipt and purchase that has been made in the year must be well kept. Think about the purchases that you have made as well as the ones you are planning to make throughout the year, then create a file and categorize all these purchases. If you do this, you will simplify the process of computing tax returns at the end of every year.
Do your own filing
You save money if you file your taxes by yourself. This is the money that would have been spent on hiring a consultant to do it for you which could sometimes be quite expensive if you are trying to save up. For you to effectively handle this, get a software program or try to find ways of going through the entire process.
Maintain a systematic record
This aspect is crucial because it determines how successful your tax planning strategies will be. All the essential paperwork and important documents must be well kept. Arrange the deductible receipts that you have with you by date so that you can get to them easily whenever you need them. They should be kept separated in different folders and labeled accordingly.
Make preparations
If you are trying to manage tax increase, you must be well prepared. Even if there is no increase, you still must prepare. Preparations have to do with knowing the correct sums that must be done before you file your taxes. There are sites where useful formulas can be obtained.
You can also acquire a software program to help with the computing process. After you have written the correct figures, you should go a step further by interpreting them properly. If you are finding it difficult to achieve, you might need to engage the services of a taxation consultant.
Check and recheck
Check the whole file more than once to be sure there are no errors in it. If you discover any mistake, correct it immediately in order to avoid a delay. As soon as you have gotten all your receivables, begin to keep track of your income and deductibles for the coming year.
What Are The Possible Ways to Decrease The Amount of Tax?
The current federal income tax brackets range from 10% to 37%, but you can get away with paying less in taxes if you’re smart about claiming deductions and credits.
As of right now, here are some ways to reduce how much you owe for the tax year:
Contribute to a Retirement Account
Retirement account contributions are a top tax-reduction tool, as they serve two purposes.
Contributions to traditional 401(k) and IRA accounts can be deducted from your taxable income and, as a result, reduce the amount of federal tax you owe. These funds also grow tax-free until retirement. If you start early, saving money in these accounts can help secure your retirement.
“Even if you haven’t executed that plan by the end of the year, you still have time,” says John Maceovsky, managing director for accounting firm CBIZ MHM in Tampa Bay, Florida.
While contributions to workplace 401(k) accounts must be made by the end of the calendar year, tax-deductible contributions can be made to traditional IRAs up until the April 15 tax-filing deadline.
Open a Health Savings Account
If you have an eligible high-deductible medical plan, contribute to a health savings account. Contributions to these accounts offer an immediate tax deduction, grow tax-deferred and can be withdrawn tax-free for qualified medical expenses. Any balance left at the end of the year can roll over indefinitely, similar to the assets in a retirement account.
Use Your Side Hustle to Claim Business Deductions
Self-employed individuals (full time or part time) are eligible for scores of tax deductions. That means your freelance projects or side gig as a ride-share driver could land you considerable tax savings.
A few of the business deductions available include business-related vehicle mileage, shipping, advertising, website fees, percentage of home internet charges used for business, professional publications, dues, memberships, business-related travel, office supplies and any expenses incurred to run your business. If you pay for your own health, dental or long-term care insurance, those premiums may be deductible too.
Just be sure to maintain proper records, says Robbin E. Caruso, a CPA and partner at accounting firm Prager Metis in Cranbury, New Jersey. She has seen many people lose their deductions for that reason.
“They are disallowed because taxpayers didn’t keep the right documentation,” she says. Be sure to keep receipts, mileage logs or other records that you can produce in the event of an audit.
Claim a Home Office Deduction
If you work for yourself or have a side business, don’t be afraid to take the home office deduction.
To qualify for the deduction, the space must be used regularly and exclusively for business purposes. For instance, if an extra bedroom is used exclusively as a home office and it constitutes one-fifth of your apartment’s living space, you can deduct one-fifth of rent and utility fees.
Write Off Business Travel Expenses, Even While on Vacation
Combine a vacation with a business trip, and you could reduce vacation costs by deducting the percent of the expenses spent for business purposes. This could include airfare and part of your hotel bill, proportionate to the time spent on business activities. Talk to a tax professional about how to make this calculation correctly.
Deduct Half of Your Self-Employment Taxes
The government assesses a 15.3% Federal Insurance Contributions Act tax on all earnings to pay for the Social Security and Medicare programs.
While employers split the cost with their workers, self-employed individuals are responsible for paying the entire amount themselves. To compensate for the extra expense, the government will let you deduct 50% of the amount paid from your income taxes. You don’t even need to itemize to claim this tax deduction.
Get a Credit for Higher Education
The government offers valuable tax credits to offset the cost of higher education. The American opportunity tax credit can be claimed for the first four years of college and provides a maximum credit of $2,500 per student per year.
Since it’s a credit, that amount is deducted from whatever tax you might owe the government. If it exceeds the amount of taxes you owe, up to $1,000 may be refundable to you.
Meanwhile, the lifetime learning credit is great for adults boosting their education and training. This credit is worth up to $2,000 per year and helps pay for college and educational expenses that improve your job skills.
See if You Qualify for an Earned Income Tax Credit
Even if you aren’t required to pay federal income taxes, you could get a refund from the government. The earned income tax credit is a refundable tax credit of up to $6,660 for tax year 2020.
The EITC is calculated with a formula that takes into consideration income and family size. The income limits for the credit range from $15,820 for single taxpayers with no children to $56,844 for married couples filing jointly who have three or more children.
Itemize State Sales Tax
Taxpayers who itemize their deductions can include either their state income tax or state sales tax on their Schedule A form. The state sales tax break is a great option if you live in a state without income taxes.
While taxpayers can use a table provided by the IRS to easily claim their sales tax deduction, Maceovsky says people should remember to add on the sales tax from any major purchase such as a car or boat.
The federal tax deduction for state and local taxes is capped at $10,000 from all sources.
How do You Manage Taxes?
While tax management does take a bit of planning, organization, and know-how, the overall financial benefit is strong.
Maximize retirement savings plans If you have an employer-sponsored retirement savings plan (such as a 401(k), 403(b), or 457) available to you, it makes sense to use it. Since you make contributions with pre-tax dollars, your taxable income and possibly your tax rate will be lowered.
Investments grow on a tax-deferred basis, so when you retire and take the money out the earnings will be taxed on your new, and usually lower, tax rate.
IRAs are part of good tax management too. Contributions to a traditional IRA are tax-deductible, and account earnings aren’t taxed until you withdraw that money at age 59.5.
There are income restrictions, though, and if you’re an active participant in an employer-sponsored retirement savings plan you can’t deduct your contributions. While contributions to a Roth IRA are always non-deductible, the earnings are tax-free.
Use your employee benefits If you are an employee, your company may offer benefits that can reduce your taxable income and therefore your tax liability (the amount you owe):
Flexible Spending Accounts (FSAs). Medical FSAs allow you to set aside money for common health-related costs, and dependent care accounts let you to save for work-related child or dependent care expenses.
For both, the money is taken out through payroll deductions on a pretax basis. Transportation plans. These plans allow you to use pretax dollars (and reduce your taxable income) to pay for public transit, vanpooling, or parking.
Pay the right amount You know you are paying the correct amount of taxes if you neither owe taxes nor receive a large tax refund. While a refund may seem positive, it is really not making the most of your income during the year.
For example, a $2,000 tax refund translates into $166 that you don’t have in your pocket every month. On the other hand, if you owe and can’t pay the entire sum, you’ll have to pay interest and possibly penalties, which will only add to your tax debt.
Make the most of your adjustments, deductions and credits Tax adjustments and deduction are expenses that you can subtract from your income, resulting in a lower taxable income. Common examples of these are:
An exemption amount for you, your spouse, each child, and any other qualified dependents, and certain disabilities
Mortgage interest paid on your primary residence
Equity loan or line of credit interest
Charitable contributions to eligible organizations
Certain business expenses
Union and professional dues
Some medical expenses
The cost of tax advice, software, and books
Depreciation of business assets
Some work uniforms and clothing
Moving expenses, in some cases
Some educational expenses
A tax credit is a dollar-for-dollar reduction in what you would owe for taxes. For example, if you qualify for a tax credit of $1000, you would be able to subtract that amount from your total tax liability. Common examples of tax credits are:
Earned income credit. This credit reduces the tax burden for lower-income taxpayers.
Education-related credits. The American Opportunity credit can be used for the expenses that you incur in the first four years of higher education. The Lifetime Learning credit applies to tuition costs for undergraduates, graduates, and those improving job skills through a training program.
Child-related credits. These include credit for child and dependent care expenses, the child tax credit, and the adoption credit.
File on time – whether you have the money or not Filing your tax return by April 15 (or August 15 if you file an extension) is important. The drawbacks of not filing include:
Your tax bill could increase by 25%, due to penalties, or interest charges on balances owed.
Additional penalties and/or criminal prosecution if you continue to not file (considered tax evasion).
Losing the refund, if there’s one due (typically after 3 years).
Even if you don’t have the money to pay, file anyway. Programs are available to help you avoid many of the harsher penalties.
Properly managing your taxes can greatly reduce the amount of money you pay in taxes and put more money into your pocket. After all, why pay more if you don’t have to?
How do I Manage Sales tax in QuickBooks?
The sales tax Center has everything you need to handle sales tax in QuickBooks. You can run reports for your sales tax liabilities, record or edit sales tax payments, and see your sales tax owed for different time periods.
Here’s how to manage sales tax payments and other tasks in the sales tax Center.
Go to the Taxes menu.
From the sales tax Owed list, select and highlight the tax agency you’re recording the payment for.
Select Record payment.
From the Bank Account dropdown, select the account you’re making the payment from.
Select the payment date and tax ending tax period ending dates from the dropdowns.
Enter the tax payment amount in the Tax Payment field.
When you’re ready, select Record Tax Payment. If you need to print a check for the payment, check the Print a Check checkbox and then select Record Payment and Print Check.
How do You Manage Black Tax?
The term ‘Black Tax’ is commonly used in South Africa, where it refers to “the financial support that black professionals are expected to give their extended families.”
How then you can you ensure you build wealth and remain financially stable while saddling additional responsibilities like the black tax? Here are some ways:
Don’t Tell Everyone What You Earn
You don’t need to tell everyone who asks what you earn. The only people who should be aware of your income are your parents (and maybe a few trusted friends). You have the right to keep the details of your income to yourself, so you don’t attract extra expenses.
Decline When You Can’t Afford To
It’s essential to learn how to say no, especially when you can’t afford a specific expense. You have to remember that you are saving for your future, so avoid anything that could steer you off track. Ward off unnecessary costs in a polite manner and stand your ground. Running into debt in a bid to support your family is a bad idea.
Stick to Your Monthly Budget
Create a monthly budget and make sure it is properly broken down, expense by expense. It’s advisable to allocate a specific amount of your income to family care/ charity. Make sure the amount is fixed, and you try not to exceed that amount.
Prioritize
It’s advisable to put your immediate family first when considering your expenses. Decide who needs your help the most and allocate some amount of money to them. Make sure you can afford the money, so the fee doesn’t leave a black hole in your bank account.
Avoid Unnecessary Expenses
When you are asked for a monetary contribution, note whether the expense is necessary or not. A family member asking for some monthly cash for aso-ebi or flex money could be considered an unnecessary expense. Shey you no go flex too? Letting others profit off your hard-earned income is a no-no. (Unless you’re cool with it – and won’t go broke afterwards)
Have Clear Financial Goals
Set clear financial goals and keep them in view, so that you can know what you are working towards and avoid anything that could affect it. These goals will remind you of what you need to achieve so that unnecessary expenses will not creep in and stand in the way of you and your goals.
How do You Deal With High Taxes?
An unexpected tax bill can ruin anybody’s day. To help avoid that unpleasant surprise, here are 10 easy moves many people can make to cut their tax bills. In many cases, you must itemize rather than take the standard deduction in order to use these strategies, but the extra effort may be worth it.
1. Tweak your W-4
The W-4 is a form you give to your employer, instructing it on how much tax to withhold from each paycheck.
If you got a huge tax bill this year and don’t want another surprise next year, raise your withholding so you owe less when it’s time to file your tax return.
If you got a huge refund, do the opposite and reduce your withholding — otherwise, you could be needlessly living on less of your paycheck all year.
You can change your W-4 any time.
2. Stash money in your 401(k)
Less taxable income means less tax, and 401(k)s are a popular way to reduce tax bills. The IRS doesn’t tax what you divert directly from your paycheck into a 401(k).
For 2020 and 2021, you can funnel up to $19,500 per year into an account.
If you’re 50 or older, you can contribute an extra $6,500 in 2020 and 2021.
These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. And if your employer matches some or all of your contribution, you’ll get free money to boot.
3. Contribute to an IRA
There are two major types of individual retirement accounts: Roth IRAs and traditional IRAs.
You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether you or your spouse is covered by a retirement plan at work and how much you make.
For the 2020 tax year, you may not be able to deduct your contributions if you’re covered by a retirement plan at work, you’re married and filing jointly, and your modified adjusted gross income was $124,000 or more. In 2021, that number rises to $125,000.
There are limits to how much you can put in an IRA, too:
For 2020 and 2021, the limits are $6,000 per year, or $7,000 for people 50 or older.
You have until the tax-filing deadline to fund your IRA for the previous tax year, which gives you extra time to take advantage of this strategy.
4. Save for college
Setting aside money for Junior’s tuition can shave a few bucks off of your tax bill, too. A popular option is to make contributions to a 529 plan, a savings account operated by a state or educational institution.
You can’t deduct your contributions on your federal income taxes, but you might be able to on your state return if you’re putting money in your state’s 529 plan. Be aware, too, that there may be gift tax consequences if your contributions plus any other gifts to a particular beneficiary exceed $15,000.
5. Fund your FSA
The IRS lets you funnel tax-free dollars directly from your paycheck into your FSA every year, so if your employer offers a flexible spending account, you might want to take advantage of it to lower your tax bill.
In 2020 and 2021, the limit is $2,750.
You’ll have to use the money during the calendar year for medical and dental expenses, but you might also be able to use it for related everyday items such as bandages, pregnancy test kits, breast pumps and acupuncture for yourself and your qualified dependents.
Some employers might let you carry money over to the next year.
6. Subsidize your Dependent Care FSA
This FSA with a twist is another handy way to reduce your tax bill — if your employer offers it.
The IRS will exclude up to $5,000 of your pay that you have your employer divert to a Dependent Care FSA account, which means you’ll avoid paying taxes on that money. That can be a huge win for parents of kids under 13 (14 in 2020 due to special rules for coronavirus), because before- and after-school care, day care, preschool and day camps usually are allowed uses.
Elder care may be included, too.
What’s covered can vary among employers, so check out your plan’s documents.
7. Rock your HSA
If you have a high-deductible health care plan, you may be able to lighten your tax load by contributing to a health savings account, which is a tax-exempt account you can use to pay medical expenses.
Contributions to HSAs are tax-deductible, and the withdrawals are tax-free, too, so long as you use them for qualified medical expenses.
For 2020, if you have self-only high-deductible health coverage, you can contribute up to $3,550. For 2021, the individual coverage contribution limit is $3,600.
If you have family high-deductible coverage, you can contribute up to $7,100 in 2020 and $7,200 in 2021.
If you’re 55 or older, you can put an extra $1,000 in your HSA.
Your employer may offer an HSA, but you can also start your own account at a bank or other financial institution.
8. See if you’re eligible for the Earned Income Tax Credit (EITC)
The rules can get complex, but if you earned less than $57,000, the earned income tax credit might be worth looking into.
Depending on your income, marital status and how many children you have, you might qualify for a tax credit of up to almost $7,000 in 2020 and 2021.
A tax credit is a dollar-for-dollar reduction in your actual tax bill — as opposed to a tax deduction, which simply reduces how much of your income gets taxed. It’s truly found money, because if a credit reduces your tax bill below zero, the IRS might refund some or all of the money to you, depending on the credit.
9. Give it away
Charitable contributions are deductible, and they don’t even have to be in cash.
If you’ve donated clothes, food, old sporting gear or household items, for example, those things can lower your tax bill if they went to a bona fide charity and you got a receipt.
Many tax software programs include modules that estimate the value of each item you donate, so make a list before you drop off that big bag of stuff at Goodwill — it can add up to big deductions.
10. Keep a file of your medical expenses
If you’ve been in the hospital or had other costly medical or dental care, keep those receipts.
In general, you can deduct qualified medical expenses that are more than 7.5% of your adjusted gross income for that tax year.
So, for example, if your adjusted gross income is $40,000, anything beyond the first $3,000 of your medical bills — 7.5% of your AGI — could be deductible. If you rang up $10,000 in medical bills, $7,000 of it could be deductible in this example.
What is The Tax Management?
A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures. The taxation system is vital for the economy of a country o run the government and manage the affairs of a state, money is required.
Tax management refers to the management of finances, for the purpose of paying taxes. Tax Management deals with filing Returns in time, getting the accounts audited, deducting tax at source etc. Tax Management helps in avoiding payment of interest, penalty, prosecution.
Elements of tax management are :
1. Filing return.
2. Auditing.
3. Source deduction.
Why Should we Reduce Taxes?
Advocates of tax cuts argue that reducing taxes improves the economy by boosting spending. Those who oppose them say that tax cuts only help the rich because it can lead to a reduction in government services upon which lower-earning individuals rely.
It’s a common belief that reducing marginal tax rates would spur economic growth. The idea is that lower tax rates will give people more after-tax income that could be used to buy more goods and services.
This is a demand-side argument to support a tax reduction as an expansionary fiscal stimulus. Further, reduced tax rates could boost saving and investment, which would increase the productive capacity of the economy.
However, studies have shown that this isn’t necessarily true. A working paper for the National Bureau of Economic Research found that tax cuts aimed at high-income earners have less economic impact that similarly sized cuts targeted at low and moderate income tax payers.
Furthermore, the Congressional Research Service concluded that the steady reduction in the top tax rates for high earners over 65 years had no correlative impact on economic growth.
In other words, economic growth is largely unaffected by how much tax the wealthy pay. Growth is more likely to spur if lower income earners get a tax cut.
How Can High Earners Reduce Taxable Income?
The good news is that with a combination of tax deductions, tax credits, and contribution strategies, you can reduce your tax bill by reducing your taxable income.
Here are 6 ways to accomplish your goal and reduce your tax bill:
1. Max Out Your Retirement Contributions
Let’s start with retirement accounts. Employer-based accounts such as 401(k) and 403(b) accounts allow you to lower your taxable income easily. That’s because every dollar you put into these accounts is not taxed until you withdraw the money from your account — and that reduces your tax burden each year you make a contribution.
The benefit here is that if you wait until you have retired to withdraw money from your 401(k), your income will be lower because you’ll no longer be drawing a salary. The result? You’ll be in a lower tax bracket, which means that the money you withdraw will be taxed at a much lower rate than it would’ve been if you’d had to pay taxes when you earned it.
You can take advantage of the tax-reducing benefits of retirement accounts by contributing the maximum amount. For 2021, the maximum 401(k) contribution is $19,500 and the maximum 403(b) contribution is the same, while the maximum contribution for SIMPLE IRAs is $13,500. Keep in mind that if you’re over the age of 50, you may take advantage of catch-up contributions of up to $6,500, as well.
2. Roth IRA Conversions
Roth IRAs are tax-free retirement accounts that can help you to reduce your tax burden and save money on your taxes, even if you’re in one of the top brackets. Unlike a traditional IRA, Roth IRA contributions are made from post-tax income. That means you’ll pay taxes before you contribute, but not when you withdraw.
That might not seem like an advantage, but it is. Any income earned on the money in your Roth IRA is also tax free. You can even roll over the money in a traditional IRA or a 401(k) into a Roth IRA and reap the same benefits.
Some of the best times to do a Roth IRA conversion are when you’ve had a year with less income than the previous year, or when you’ve retired and are temporarily in a lower tax bracket. This strategy makes sense if you can wait until the age of 70 ½ to make mandatory withdrawals.
We like to suggest this option to our clients because it’s easy to overlook, especially when people are focused on tax deductions as a way of reducing their taxable income.
3. Buy Municipal Bonds
Municipal bonds might not be the most glamorous investment, but we often recommend tax-exempt bonds to our high-income clients. When you buy a municipal bond, you lend money to the issuer in exchange for set interest payments over the period of the bond. At the end of the period, the bond is mature, and the original investment is returned to the buyer.
The income from tax-exempt bonds is usually exempt from all income taxes, including federal, state, and local taxes. Even the interest payments from the income may be exempt from taxes.
Of course, municipal bonds usually earn less income than other taxable bonds, but they can still be a worthwhile strategy for reducing your tax burden. You can decide whether they’re worth it by calculating the bond’s tax equivalent yield.
4. Sell Inherited Real Estate
If you’ve inherited real estate from a parent or someone else, you may not realize that you can save money on property taxes by selling the real estate quickly. Here’s why:
Let’s say your parents bought a home for $200,000 and it is now worth $900,000. If they’d sold it while they were alive, they would’ve paid capital gains on $700,000. If you hold onto the house, you’ll have a stepped-up tax basis of $900,000 and will be required to pay property taxes on that amount, thus significantly limiting your potential gain from the sale. The goal is to minimize your capital gains tax liability.
The alternative is to sell the home quickly after you inherit it, thus saving money on property taxes and maximizing your inheritance. Of course, you should also know that you can avoid capital gains tax by rolling the income from the sale into another real estate investment within 180 days.
5. Set Up a Donor-Advised Fund
You probably already know that donating money to charity offers the opportunity for a tax deduction in the year the donation is made. What you may not know is that you can get a deduction this year for several years’ worth of contributions if you set up a donor-advised fund.
A donor-advised fund is a charitable fund that you can set up that allows you to decide how and when to allocate funds to charities. You can make contributions this year and take the full tax deductions for several years on your tax return, thus reducing your tax bill. Then, going forward, you can decide how much money to donate per year and where to donate it.
We often recommend this strategy to our high-income clients, especially if they have a year with higher-than-normal income due to an inheritance or windfall. It’s a good way to use charitable deductions to your advantage. You can find plenty of information about Donor Advised Fund management online so, if this is something you are interested in, make sure to do your research so that you fully understand what it entails before you set one up.
6. Use a Health Savings Account
Finally, you may choose to contribute some income to a Health Savings Account (HSA) to save on your taxes. You may contribute only if you’ve selected a high-deductible insurance plan. For 2021, the maximum contributions are:
$3,600 for individuals
$7,200 for families
You may contribute an additional $1,000 if you are 55 or older. HSA contribution limits are linked to inflation, even though cost increases for medical expenses typically outpace inflation every year.
You can use the money in your HSA for medical and dental expenses as well as related costs, such as over-the-counter medication and first aid supplies. If you withdraw money and use it for non-qualified expenses, then you will pay tax on your withdrawals.
You should know that the money in your HSA is yours forever, unlike the money you contribute to a Flexible Spending Account, which must be spent during the tax year. For that reason, you may want to consider an HSA, you’ll need to weigh the risks of having a higher deductible against your potential savings.
How do Billionaires Not Pay Taxes?
Billionaires have avoided taxation by paying themselves very low salaries while amassing fortunes in stocks and other assets. They then borrow off those assets to finance their lifestyles, rather than selling the assets and paying capital gains taxes.
Such tax avoidance could be adapted to the new system, for instance by shifting wealth from tradable assets like stocks to less liquid ones like real estate or companies.
Such non-tradable assets would not be taxed yearly, but to discourage a flight of capital from stocks and bonds, Democrats’ tax proposal would impose a new interest charge on them, which would be paid when those assets were sold, on top of the existing capital gains tax.
How Can I Avoid Tax Illegally?
How do you know when shrewd planning—tax avoidance—goes too far and crosses the line to become illegal tax evasion? Often the distinction turns upon whether actions were taken with fraudulent intent.
Business owners often find themselves subject to more scrutiny than wage-earners with a similar level of income. Why? Because a business owner has more options to avoid tax, both legally and illegals. Here are some of the most common criminal activities in violations of the tax law:
Deliberately under-reporting or omitting income. This is self-explanatory: concealing income is fraudulent. Examples include a business owner’s failure to report a portion of the day’s receipts or a landlord failing to report rent payments.
Keeping two sets of books and making false entries in books and records. Engaging in accounting irregularities, such as a business’s failure to keep adequate records, or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements, generally demonstrates fraudulent intent.
Claiming false or overstated deductions on a return. These range from claiming unsubstantiated charitable deductions to overstating travel expenses. It can also include paying your children or spouse for work that they did not perform. The IRS is always vigilant when it comes to inflated deductions from pass-through entities.
Claiming personal expenses as business expenses. This is an easy trap to fall into because often assets, such as a car or a computer, will have both business and personal use. Proper record-keeping will go a long way in preventing a finding of tax fraud.
Hiding or transferring assets or income. This type of fraud can take a variety of forms, from simple concealment of funds in a bank account to improper allocations between taxpayers. For example, improperly allocating income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder’s children, is likely to be considered tax fraud.
Engaging in a “sham transaction.” You can’t reduce or avoid income tax liability simply by labeling a transaction as something it is not. For example, if payments by a corporation to its stockholders are in fact dividends, calling them “interest” or otherwise attempting to disguise the payments as interest will not entitle the corporation to an interest deduction.
What Are Tax Planning Strategies?
1. Convert traditional IRAs into Roth IRAs
If you’re anticipating that tax rates will go up, converting traditional IRAs into Roth IRAs will allow you to take advantage of lower current tax rates. Unlike a traditional IRA, a Roth IRA does not have required minimum distributions when you reach age 72, and the distributions are not taxed when you take a withdrawal in retirement.
When planning for your Roth conversion, be mindful of where you lie within your tax bracket. If you’re on the lower end, you have room to make a Roth conversion without getting bumped into the next tax bracket.
If you’re a business owner and experienced business losses due to the pandemic, this may be a good year to make a Roth conversion because you can net the business loss against the Roth conversion to offset how much you have to pay in taxes. Remember that starting in 2021, there are limits on the amount of business losses that can be claimed with excess amounts being carried forward.
2. Make charitable contributions
The CARES Act extended the suspension of the 60% adjusted gross income (AGI) limit, allowing individuals to deduct cash charitable contributions made in 2021 up to 100% of their AGI.
However, if tax rates do go up, deductions become more valuable in a future year at that higher rate. Talk to your tax advisor about which scenario makes more sense for your situation, as well as what other limitations may apply to the charitable contributions you make.
3. Use your estate tax exemption
Many people are concerned that the lifetime estate and gift tax exemption of $11.7 million ($23.4 million for a married couple) will decrease to $5 million, $3.5 million or potentially as low as $1 million. If you have a sizable estate, gifting assets to your children or into a trust this year can allow you to use the exemption while it’s still at $11.7 million. Gifts made under current law would be grandfathered in, even if the exemption does decrease.
Note that on January 1, 2026, the exemption will automatically decrease to $5.49 million (albeit adjusted for inflation) unless Congress takes action, which makes it critical to begin planning your gifting strategy now.
4. Pull income into 2021
The Tax Cuts and Jobs Act allows a 20% deduction for qualified business income from pass-through entities. Certain proposals aim to reduce or eliminate this deduction. If you’re a small business owner and you believe this deduction may decrease, you might consider whether you can pull income — such as any business contracts you negotiate through the remainder of the year — into 2021 at a lower tax rate and higher deduction.
Talk to your tax advisor, as there are numerous rules and limitations in determining what business income qualifies for the 20% deduction.
5. Set up a SEP-IRA for your business
Small business owners should also consider setting up a retirement account for their business. A SEP-IRA allows employers to contribute to traditional IRAs set up for employees — including the business owner — up to the lesser of 25% of the employee’s compensation or $58,000 for 2021.
This amount is much higher than the $6,000 limit ($7,000 if age 50 or older) individuals are allowed to contribute annually to a traditional or Roth IRA, making them a very attractive tool for retirement savings.
One more added benefit? As the employer, SEP-IRA contributions are deducted before you calculate your AGI, which may result in an overall lower tax bill.
6. Introduce your advisory team to each other, and communicate early and often
When your advisory team works together, things run faster and smoother, and strategies are easier to identify and execute upon. This includes tax planning, financial planning and estate planning. We recommend introducing your CPA to your financial advisor and attorney so they can share critical documents, collaborate and set you up for greater financial success.
Your advisory team is there to give you advice and recommendations. Strategies can also take time to implement, so working through them now can help put you in the best position to react to potential tax changes.
How Does Increasing Taxes Help The Economy?
Although it is not usually popular with the American public, the concept of raising taxes does offer certain benefits. In some cases, additional tax dollars are needed to continue vital services or to balance budgets.
So-called “sin taxes” such as those levied on tobacco products are generally more palatable to the voting public and can offer additional benefits such as improved health. Raising taxes on wealthier individuals can help those who are less fortunate.
More Revenue
Raising taxes results in additional revenue to pay for public programs and services. Federal programs such as Medicare and Social Security are funded by tax dollars. Infrastructure such as state roads and the interstate highway system also require taxpayer funding. Real estate and property taxes are used to build and maintain schools.
Health Benefits
Taxing potentially harmful items such as tobacco could discourage people from using them. According to a TobaccoFreeKids.org study, if every state and the District of Columbia added a $1-per-pack tax on cigarettes, 2.3 million kids would not take up smoking, 1.2 million adults would give up the habit and 1 million premature smoking-related deaths would be prevented.
Political Ramifications
TobaccoFreeKids.org also indicates that raising tobacco taxes could have positive impact for politicians. The website cites a 2010 national poll showing that 67 percent of Americans are in favor of a $1 tax increase per pack of cigarettes. Politicians who support an increase may find themselves in good favor with their constituents.
Balancing Budgets
A 2010 study by the Center on Budget and Policy Priorities shows that 48 states face budget shortfalls totaling $148 billion, the largest gap ever recorded. As many states struggle with budget shortfalls and high debt as of 2010, cutting programs and raising taxes may be the best, albeit painful, alternatives for balancing budgets.
Sharing the Wealth
In theory, higher taxes could result in wealthier people helping to support those who are less fortunate. By raising taxes on those who earn in excess of a certain income level, the additional revenue could be used to fund programs for the poor or disabled without significantly impacting the lifestyle of the rich. This concept avoids placing an additional tax burden on middle-income wage earners who may not be able to afford additional taxation.
What Are The Pros And Cons of Taxes?
Taxes are involuntary charges that are imposed on taxpayers by governments or municipalities in order to fund government spending and to raise money for public infrastructure projects.
Although taxes have a variety of advantages, there are also some problems related to them.
Pros of Taxes
Money to fund public infrastructure projects
Better public education
Childcare facilities
Improvements in public transport
Better healthcare
Technological progress can be accelerated
Income tax usually increases with the income of a person
Assurance of security
Politicians have to be paid
Court system has to be financed
Money for military services
We need firefighters
Social duty to contribute one’s part
Assurance of social security schemes
Mitigation of the wealth gap between the poor and the rich
Instrument to ensure the financial stability of a country
Tax cuts in crisis times to foster the economy
Governments can tax unhealthy products at a higher rate
Cons of Paying Taxes
People have less money to spend
Less overall savings in bank accounts
Investments for the future might suffer
Taxes may discourage people to work hard
People may try to avoid tax payments
Tax schemes may be considered to be unfair
Big corporations often try to avoid paying taxes
Money may be spent in an ineffective manner
Politicians may act opportunistically
Lobbying may lead to waste of government funds
Confined freedom
What Happens When Taxes Increase?
By increasing or decreasing taxes, the government affects households’ level of disposable income (after-tax income). A tax increase will decrease disposable income, because it takes money out of households. A tax decrease will increase disposable income, because it leaves households with more money. Disposable income is the main factor driving consumer demand, which accounts for two-thirds of total demand.
Taxes lower households’ disposable income. The amount collected in taxes doesn’t find its way into consumption. But if the government spends every dollar that it collects in taxes, then that amount does find its way into total demand through government expenditures. When that occurs, the GDP remains unaffected by taxes.
The size of the economy is the same whether people choose to produce and consume private goods (angora sweaters) or public goods (army uniforms). The mix of goods doesn’t affect the level of GDP, as long as the total amount spent on them doesn’t change.
Is Tax Good or Bad?
Are taxes bad? If you’ve been listening to conservatives for the last several decades, you would certainly think so. Virtually every Republican candidate for office in recent memory has run on an anti-tax platform – arguing that Americans are overtaxed, that taxes hurt economic growth, etc.
And it is this hatred of taxes that helped propel the passage of hundreds of billions of dollars of tax cuts during the administration of George W. Bush.
This anti-tax campaign strikes a real emotional chord in some Americans and it has been one of the most effective rallying cries of anti-government conservatives.
It taps into a taxophobia that is deeply ingrained in American political culture and that manifests itself in the activities of over 800 local and state anti-tax groups. These tax-haters have also been playing a large part in organizing the grassroots Tea Party movement.
But conservatives are dead wrong about taxes. Taxes are not bad.
Taxes are good.
The argument for taxes is a very straightforward one: if government is on balance a very positive force in society, then taxes are good. If what we have seen in other articles on this website is true – that government programs help us all in myriad ways every day, that most government programs are working effectively to solve our social problems, and that government is the only way to promote important values like justice and economic security – then the taxes needed to support these government activities should be seen as a positive good.
To put it another way, you can’t support the things the government does – like caring for the elderly, establishing justice, providing public education, fighting terrorism, and protecting the environment – and still maintain that the taxes that support those things are bad. Taxes are the lifeblood of government and so if government is basically good, then so are taxes.
So instead of seeing paying taxes as analogous to being mugged by the government, we ought to think of these payments more like the tithing that many people do in their churches and synagogues. Most people see these regular donations as a charitable contribution to the good works being done by these religious organizations – and they certainly don’t resent these contributions.
But if the government is also an institution dedicated in large part to doing good works – to promoting the public interest – then we should not resent our taxes contributing to those governmental activities. In fact, we should feel good about all the good our tax dollars are doing – just as we feel good about all the good our religious donations do.
Of course it could be argued that there is a big difference here – that giving money to churches is voluntary and we are required to pay taxes. But in practice, many religious organizations require members who can afford it to contribute regularly – payments that are really more like mandatory dues than purely voluntary donations. In any case, the point is that contributing toward an organization that is promoting the public good should not be seen as a bad thing.
How Can I Reduce my Taxable Income in 2022?
Tax reform eliminated some of the complicated, itemized deductions that taxpayers could use in the past. But there are still ways to save for the future and trim your current tax bill. And if you’re feeling unsure about the best path forward, it’s always a good idea to consult a professional. Reaching out to a company that specializes in wealth strategies peoria, or wherever you’re based, can help you navigate your options with clarity and confidence.
Save for Retirement
Retirement savings are tax-deductible. This means every dollar you put into a retirement account reduces your taxable income.
For you to reap this tax benefit, the retirement account has to be recognized as such by law. Employer-based retirement accounts, such as 401(k) and 403(b), will reduce your taxable income.
If you are self-employed or earn money from a side-hustle, you can also contribute up to 20% of your net self-employment income to a Simplified Employee Pension to reduce your taxable income. On top of both of these options, you can also contribute to an Individual Retirement Account (IRA) to reduce your taxable income.
To maximize your tax benefit, you should max out your retirement contributions.
The tax benefit of saving for retirement is two-fold. Firstly, every dollar you put into your retirement account is not taxed until you withdraw the money from your account. Your retirement contributions are pre-tax contributions, hence why they decrease your taxable income.
This means your tax burden is reduced each year you contribute. Then, if you wait until you have retired to withdraw your money from your retirement account, you will be in a lower income bracket and will be taxed at a much lower rate.
It is important to note that Roth IRAs and Roth 401(k)s will not reduce your taxable income. Your Roth contributions are post-tax contributions. In other words, the money you put into your Roth account has already been taxed.
This means it will not be taxed when you withdraw the money from your account. Investing in a Roth account still spreads your tax burden, but will not reduce your taxable income.
Buy tax-exempt bonds
Tax-exempt bonds might not be the most glamorous investment, but is a good way to reduce your taxable income. The income and even the interest payments from tax-exempt bonds are exempt from tax. This means when your bond matures, your original investment is returned without being taxed.
Utilize Flexible Spending Plans
Your employer’s answer to how to reduce taxable income might be to offer a flexible spending plan. A flexible spending account is an account managed by your employer. You set aside a portion of your pre-tax earnings and your employer uses it to pay for things such as medical expenses on your behalf.
Utilizing a flexible spending plan decreases your taxable income and provides a reduction in tax bills during the year in which the contribution is made.
A flexible spending plan could be a use-or-lose model or offer a carry-over option. On the use-or-lose model, you have to spend the money you contributed this tax year or forfeit the unspent amounts. In a carry-over model, you can carry over up to $500 of unused funds to the following tax year.
Use Business Deductions
If you are self-employed, you can reduce your taxable income by claiming all of the business deductions available to you. You can claim business deductions on full- or part-time self-employed income.
For example, you claim business deductions for the cost of running your home office, the cost of your health insurance, and a portion of your self-employment tax.
If you have big deductible purchases, make them by the end of the tax year to reduce your taxable income and spread your tax burden across tax years.
Give to Charity
If you claim it properly, making charitable contributions will reduce your taxable income.
For cash contributions, make sure you have proof of your donation. If you donate $250 or more, you’ll also need an acknowledgement from the charity.
If you have a share that you have owned for more than one year, you can also donate the security to a charity. You can deduct the full value of the security and you won’t have to pay taxes on capital gains. A donor-advised fund is another way to donate securities and gain a tax benefit from it.
Pay Your Property Tax Early
If you pay your property tax early it will reduce your taxable income for the current tax year. Property tax is one of the more complicated ways of reducing taxable income. Before paying your property tax early, talk to your tax preparer to determine whether you’re vulnerable to the alternative minimum tax.
Defer Some Income Until Next Year
If you have had a series of incomes this tax year that you think won’t apply to you next year, you can try to defer some of your income to the next tax year. If you defer some of your income, you will only pay tax on them next year. This is worth it if you think it will help you fall into a lower tax bracket next year.
Some ways of deferring income are to ask for your year-end bonus to be paid the following year or send bills to clients late in the tax year.
Do Donations Reduce Taxable Income?
Charitable donations of goods and money to qualified organizations can be deducted on your income taxes, lowering your taxable income. Deductions for charitable donations generally cannot exceed 60% of your adjusted gross income, though in some cases limits of 20%, 30% or 50% may apply. If you don’t have a lot of cash, there are still many opportunities to donate and save money on taxes at the same time.
Donating to charity is a great way to show your giving spirit and save money on your taxes at the same time. Even if you don’t have a lot of money to give to charity, you can give your unwanted clothing and household items and still get a deduction.
When you’re in a high income bracket, it’s important to find ways to reduce taxable income every year. You should work with a qualified tax accountant to make sure that every tax credit and tax deduction you qualify for is reflected on your taxes. The additional tax reduction strategies we’ve outlined here will help you minimize your taxes in 2021 and beyond.
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