One of everyone’s biggest and most consistent expenses are taxes. Since you’re going to be paying taxes all your life, doesn’t it make sense to learn a bit about the tax system so you can reduce your taxes by as much as possible?
There are many ways the average person can reduce their taxes. You don’t need to be a millionaire to put a smart tax plan in place that helps reduce your taxes.
Here are three tips to help you cut down on your taxes, every year.
==> Use a Tax Deferred Savings Account
As Albert Einstein put it, “The most powerful force in the universe is compound interest.”
When you earn money and then pay taxes on it, you have less money to invest. Less money to invest upfront means much lower returns, because you’re missing out on the power of compound interest.
However, what if you could delay paying your taxes until *after* you’ve already compounded your money? What if you could earn $100 today and invest it for 20 years – And then pay your taxes?
Most people pay their taxes the moment they earn them. They typically pay around 25%. When you compound that money, it makes a big difference.
That’s what 529 plans or 401K/IRA plans are designed to do. They allow you to defer your taxes to a later date, when so you can earn money with your income first and then pay uncle sam later.
It’s almost always a good idea to try to max out your contributions. This can save you a lot of money on taxes.
==> File Taxes Electronically
If you’re not filing your taxes electronically, you’re probably leaving money on the table.
Electronic filings help you save money in several ways.
First, it helps check your work for errors. Tax filings involve a lot of complicated paperwork and mistakes are very common.
Removing these mistakes will often help you reduce your tax bill. It will also help you get your checks from the government faster.
==> Sell Off Losing Assets
If you have stocks or other assets that lost rather than gained value, you might want to consider selling them off in this current year. Here’s why.
The government looks at your capital gains and losses on an annual basis. If you sell off losing assets during this year, you can write it off as a loss this year.
Writing off investment losses allows you to offset $1 in profit for every $1 you lost as far as your investments go. In other words, you can use your losses to reduce the taxes you’d pay on your gains.
What if you didn’t want to write off your investment gains? You can still use your losses to offset your income tax, though the writeoff is limited to $3,000.
These are just a few ways of reducing taxes that anyone can take advantage of. Start deferring your taxes today to earn more compound interest, reduce errors in your filings by using electronic filings and strategically sell your losses to offset your other taxes.