Did you know you can protect your earnings from taxes without resorting to a Swiss account? Here are nine of the best IRS approved tax shelters you can use to reduce your tax bill.
- Set Up a Retirement Account
Tax-deferred retirement accounts like an IRA or 401(k) allow you to save money on taxes now by deferring to pay taxes in retirement. For the 2020 tax year, you could contribute up to $6,000 to a traditional IRA or $7,000 if you were age 50 or older. For 401(k) investment accounts, you could’ve contributed up to $19,500. Those age 50 or older could’ve contributed up to an additional $6,500 as a catch-up contribution. Keep in mind that your retirement funds will be taxed when you make an early withdrawal; however, there are some exceptions. Remember that it might be a good idea to begin contributing to a tax-deferred retirement account now because you could fall into a lower tax bracket when you retire.
- Buy a Home
One of the real advantages of home-ownership is claiming several tax deductions that renters cannot. The IRS allows you to deduct qualified expenses related to owning a home, including home mortgage interest, mortgage insurance, real estate taxes, and even building materials for a new construction.
- Protect Your Capital Gains
If you sell your home and earn a significant profit, you can protect it from being taxed if you meet specific requirements. You need to pass an IRS ownership test and report your income using Form 1099-S. Also, you must use Schedule D (Form 1040) to report the capital gain and Form 8949 to report the sale of your home. Single homeowners can exclude up to $250,000 of capital gains from their incomes, and married couples filing jointly can exclude $500,000.
- Open a Health Savings Account
Quickly reduce your tax liability by opening a Health Savings Account (HSA). With an HSA, you can use the nontaxable funds to cover out-of-pocket medical and health expenses including, dental work, eyeglasses, contacts, and more. Fund your account straight from your paycheck and use the money when you need it. For 2020, max contributions were up to $3,550 if you were single or up to $7,100 for families.
- Become an Angel Investor
Angel investors invest in startups and small businesses. Although risky, angel investors can potentially both receive a tax credit and give you an excellent return on your investment if the business succeeds.
- Use the Child Tax Credit
Although parenting may be intimidating (and expensive), your children could also help you protect some of your hard-earned dollars. The child tax credit enables you to claim $2,000 per qualifying child. Also, up to $1,400 of that credit is refundable for each qualifying child.
- Workplace Benefits
If you’re self-employed and using part of your paycheck to pay for health insurance, you might qualify for a deduction. According to TurboTax, you can deduct “premiums that you pay for medical, dental and qualifying long-term care insurance for yourself, your spouse and your dependents.” The deduction lowers your adjusted gross income and, thus, reduces your overall tax liability. For those employed, you can itemize qualified medical expenses to get a deduction.
- College Savings Plan
A college savings account, otherwise known as a 529 plan, is provided by a state or educational institution that allows for several tax benefits. For example, account earnings aren’t federally taxed when used for qualified educational expenses. Also all qualified withdrawals aren’t subject to federal taxes.
- Owning a Business
Business owners can deduct a variety of qualified expenses used to keep your business in operation. The IRS defines an allowable expense as being “both ordinary and necessary,” and not used to figure the cost of goods sold, personal expenses and capital expenses. Some eligible business expense deductions include: employees’ pay, retirement plans, interest and insurance. Small-business owners may also deduct use of your car and your home if used for your business.
- Set Up a Retirement Account
Article from MSN.com