It has been said that taxes, like death, are inevitable. In reality, however, there are plenty of things that you can do to play much less tax. Let's take a look, therefore, at just 5 ways to lower your tax bracket. Other ways exist as well, but these are the main ones. It should be pointed out that none of these strategies allow you to avoid tax, which would be illegal.
Here Are 5 Ways to Lower Your Tax Bracket:
1. Only earn the allowed tax-free income. Different types of income are tax free, and you need to maximize on these as much as possible. For instance, you could sell your home, invest in municipal bonds, save for your child's education, pay into a health savings account, receive employee benefits and health insurance, spend on health care costs, and donate some of your investments to your dependents.
2. Use tax credits as much as possible. What this does is reduce how much tax you have to pay on each dollar, which deductions don't do. Congress really likes tax credits, and new ones are being added regularly. For instance, you can get credits for making green improvements to your home, for purchasing a hybrid, or by ensuring you pay for childcare or child education.
3. Defer your taxes, which means you will pay for it later. This basically means you borrow from the state, but at least you don't have to pay interest on it. For instance, you could invest in a retirement account or an IRA.
4. Get top tax deductions, which is the most used method among the 5 ways to lower your tax bracket. Essentially, the more you can deduct, the less you have to pay. You can deduct all of your business expenses if you run a business, which includes maintaining your office, your inventory, your operating costs, your travel, and so on. You can make the standard deduction, or you can itemize it. If you itemize it, then you will include personal things such as the interest rate on your mortgage, charitable donations, property taxes, state income tax, and so on. However, make sure you learn how to itemize this properly.
5. Lower your tax rate. Depending on your bracket, your federal tax rate could be anything from 0% to 39.6%. If you earn income from things like real estate, mutual funds, bonds, stocks, and other long-term investments, you can enjoy some really low rates on them. Any profits that come from these investments are classed as long-term capital gain, which has a lower rate than regular income. For instance, those who are in the highest tax bracket and pay 39.6% will only have to pay 20% on long term capital gains. This is quite a big difference! If you are in the 25%, 28%, 33%, or 35% bracket, the capital gains tax is 15%. If you are in the 10% or 15% bracket, capital gains is 0%. This could, clearly, be very significant savings, depending on which bracket you are in.