How can you reduce your tax obligations? This is a question on every taxpayer’s mind, but few are able to execute this to their benefit, owing to a lack of adequate knowledge or poor advise. However, with the 2019 financial year closing in by the day, you still have a few months to plan your taxes well and reduce your tax obligations.
Tax planning is a tool that can help you analyze your spending and show a clear path to help you save big on your taxes. We have collated a few exciting tax-saving tips which can reduce your 2019 tax liabilities and make your tax filing a worthwhile experience. Let’s take a look.
This is a very well-known practice wherein you can defer your due payments to a later date which does not form part of the current tax cycle. Many businesses use this method to differ their taxable income until the next tax cycle.
Make the most of your Investment Income
You can reduce your tax liabilities by making the most of preferential tax rates on income earned through investments. All income derived from investments held for more than a year is subject to preferential capital gain tax rates which vary from 0%, 15% or 20% for most investments. The income slab decides the tax rates. For example, if your income is less than $78,750 (for joint filers), $52,750 (for heads of household) or $39,375 (for other individuals), then the tax rate would be 0%.
Indulge in Gifting
If your income is higher such that that it doesn’t fit into the 0% tax slab, then you can consider gifting investments like appreciated stock or mutual funds to your children or grandchildren. Since they would generally come in the 0% or 15% capital gains tax rate, you can save that extra amount on investments made by you.
Make the most of Capital Losses
You shall make it a habit to review your investment portfolio every now and then. By reviewing, you can fathom the losses made by you on your investment and take tax benefit for the same. You shall do so to shelter capital gains made during the year and take advantage of $1500 (married and filing separately) and $3000 (filing jointly) limit on deductible net capital losses.
Invest in Qualified Business Corporations
Investing in C Corporations and Qualified Business Corporations can prove to be quite beneficial to you from a tax perspective. Such corporations are subject to a flat 21% tax rate which is quite low. Qualified Business Corporations are domestic C corporations whose corpus does not exceed $50 million, and at least 80% of it is used in the conduct of a qualified business.
Invest in a Qualified Opportunity Zone
Qualified Opportunity Funds are investments made to carry out business in a low-income community known as opportunity zones. There are lucrative tax benefits on income earned through operations in such zones. The two significant advantages of investing in a Qualified Opportunity Zone: –
- Ability to temporarily differ or partially exclude gains made from the sale of a property in Qualified Opportunity Zone if the same amount is reinvested in QPZ.
- Ability to exclude 10% of the gains if such property is held for at least five years (additional 5% exclusion), and 15% if held for at least seven years or more.
Adjust Tax Withholdings and Estimated Payments
You can consider adjusting your tax withholdings and estimated payments while filing your federal income tax returns. Tax Withholdings are mandatory deductions made by employers from their employee’s paycheck. Such accumulated withholdings can be further adjusted while paying your returns. Hence, use the withholding calculator on the IRS website to calculate the amount of your withholding and recheck with the employer if they are deducting the right amount.
Make qualified charitable donations
You may consider directing your RMDs from a retirement account apart from SEP or simple IRA to a charity. By doing so, you can convert your RMDs into a qualified charitable distribution and exclude an amount of maximum $1,00,000 of your RMD from your taxable income.
Establish a Qualified Tuition Plan
You can sign up for a qualified tuition plan and start saving for your ward’s college education before they grow up. Such plans qualify for federal tax benefits and the amount collected as a part of this plan is not taxable. Establishing such an account would allow you to withdraw the saved amount tax-free for qualified higher education.
Involve your children in the family business
Another excellent tax-saving method requires you to hire your children in your company. Many business owners do this to reduce their tax liabilities. By doing so, you can reduce the amount of your taxable income, and since your child’s income might not come in the tax bracket, you may save some tax there also.
Therefore, we may conclude that tax planning can reap you great benefits when done right! There are many ways through which you can reduce your tax obligations and manage your finances. Though there would always be a different mix for different people, the concluding factor shall be getting a tax break and reducing liabilities. You still have one quarter to plan your finances and investments to save big on your 2019 tax returns. You can contact the MyTaxFiler experts to understand how you can plan your taxes in an optimized manner.