Most of us would probably agree that taxes are a drag. And the bad news is that it’s pretty difficult to get out of paying taxes completely. It’s technically possible to do so if you’re a low enough earner, but then, well, you’re living on very little. So that’s not ideal.
But while you may not be able to get away with paying the IRS $0 year after year, you should know that there are plenty of actions you can take to set yourself up to pay less tax. And the best part? They’re completely legal. Here are some IRS-approved tricks that could save you a bundle.
1. Holding investments for a year and a day before selling them
When you sell investments in your brokerage account at a profit, you’re required to pay taxes on your gains. But in some cases, you may not have to.
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Capital gains are grouped into two categories: short term and long term. The former applies to assets held for a year or less before being sold, while the latter applies to assets held for at least a full year and one day.
If you hold assets long enough to qualify for long-term capital gains, you can lower your tax burden on those gains. And if your income is low enough, you may not have to pay taxes at all.
People who are single with an income of $44,625 or less or married filing jointly with an income of $89,250 or less get to enjoy a 0% tax rate on long-term capital gains. By contrast, a single person earning $30,000 a year would be subject to a 12% tax rate on short-term capital gains.
2. Contributing to a traditional retirement plan
When you put money into a traditional 401(k) or individual retirement account (IRA), you get a tax break on your contribution. And that means you’ve shielded some income from the IRS’s reach.
Let’s say you contribute $3,000 to a 401(k) and you fall into the 22% tax bracket (meaning, that’s the rate of tax you pay on your highest dollars of earnings). Not paying the IRS taxes on that $3,000 of income could mean saving yourself $660. But no matter what tax bracket you fall into, it pays to fund a retirement account so you’re not paying taxes on at least a portion of your wages.
If you’re self-employed, you should know that you’re allowed to claim deductions on your taxes for expenses incurred in conjunction with doing business. You just need to keep an accurate record of those expenses and know what you’re allowed to claim.
Let’s say you have a side gig that pays you for reviewing different video games. You may be eligible to deduct the cost of those games on your taxes (an accountant should be able to tell you if you can deduct the entire cost there, or part of the cost). And if you buy accounting software to help you track your earnings, that, too, should be an allowable deduction.
If you’re starting your own venture or are first going from being a salaried employee to being self-employed, it could pay to sit down with an accountant and discuss potential deductions. That way, you’ll know what records to focus on maintaining.
The tax code is loaded with ways to pay the IRS less — you just have to know what those entail. If you time the sale of assets strategically, pump money into the right retirement plan, and claim appropriate deductions, you can potentially save yourself a whole lot of money on taxes.
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