Best Ways to Pay less income tax

It’s always a good idea to invest with a view to build wealth. However, when you sell an asset to book profits in the short term, your capital gain is termed as short-term capital gain. Holding the same asset (real estate, bonds, mutual fund units, etc.) for more than a year brings along the benefit of a favorable tax treatment for long-term capital gains.

Long term capital gains are taxed on preferential basis depending on your income level at 0, 15, and 20 percent. Short term capital gains, on the flip side, are taxed at the taxpayer’s ordinary income tax rate. 

Charitable contributions made with checks, payroll deduction, cash, and donation of clothing and goods are all deductible. People usually forget to add their non-cash contributions while filing taxes. You need to itemize your charity to claim a deduction.

Combine your vacation trip with a business trip and you can reduce the costs by deducting the percent of expenses spent for business purposes. This includes hotel stay and airfare. Talk to a tax professional to make the calculations correctly.

Municipal bonds are issued by a state or local government, and pay you a fixed amount of interest until the bond’s maturity. Upon maturity, you receive the entire face value of the bond.

The interest on municipal bonds is exempt from federal taxes, and some states also offer a similar benefit of exemption – but not all states do. The exemption particularly benefits investors in the higher tax brackets because of the higher tax equivalent yield. 

Freelancers and self-employed individuals are eligible for scores of tax deductions. A few of the business deductions include advertising, shipping, business-related vehicle mileage, website fees, professional publications, percentage of home internet charges used for business, office supplies, and any expenses incurred to run your business.

You can deduct tax for health, dental, or long-term insurance as well if you pay for it yourself.

Just ensure to keep all the receipts with the right documentation at the time of filing the tax.

If you live in a state without income taxes, then state sales tax break is a great option for you. Add any and every major purchase in the Schedule A form. The federal tax deduction for state and local taxes is capped at $10,000 from all sources. 

The government offsets the cost of higher education by offering valuable tax credits. The American opportunity tax credits provide a maximum credit of $2,500 per student per year and it can be claimed for the first four years of college.

Open health savings account if you are eligible for a high-deductible medical plan. Contributions to these accounts offer tax-free withdrawal for qualified medical expenses, immediate tax deduction, and grow tax-deferred. Any balance left at the end of the year can roll over indefinitely like assets in a retirement account.

If you have a side business at home or if you are self-employed and work from home, then you can opt for a home office deduction. To qualify for this deduction, the home office space must be exclusively and regularly used for business purposes. For example, if an extra bedroom is used as your home office and it constitutes 1/4th of your home, then you can deduct 1/4th of rent and utility fees.

For employers who receive healthcare benefits from their company, their employers split the cost for Social Security and Medicare programs. Self-employed individuals are responsible for paying the entire amount themselves. So, to compensate for the extra expense, the government lets you deduct 50 percent of the amount paid on income taxes. You don’t need to itemize to claim this tax deduction.