How To Reduce Tax Liabilities

Invest In Your Employees

Finally, one of the best ways to reduce your taxable income is to reinvest earned money back into your business, specifically your employees. This will reduce your tax burden while simultaneously giving your team better chances of success.

Generally speaking, the salaries, wages, bonuses and other compensation you pay your employees in a given year are tax deductible so long as they fit the following criteria:

• The compensation is both ordinary and necessary.
• They are a reasonable amount.
• They paid for services that were actually provided.
• They were paid for or incurred in the current year.

Investing in your business by hiring skilled employees can lower your tax burden, but employee retirement contributions are also tax deductible for employers. According to the IRS, employers may deduct 401 contributions as long as they dont exceed the limitations described in section 404 of the Internal Revenue Code.

Offering your employees matching, profit-sharing or safe harbor contributions is a great way to boost their morale, attract the top talent and grow your business as research shows happy employees are more productive workers.

Key takeaway: Reduce your taxable income by understanding deductions and credits, make tax-friendly investments, and invest in your employees.

How To Reduce Tax Liabilities For Your Business In Tampa

As a business, you always have a margin to minimize your tax liability and maximize tax benefits. But this requires a lot of strategic planning and hiring a certified public accountant to help you get your tax deductions in order.

If you want to reduce your tax liability without getting into the IRS crosshairs, here are some tax tips you need to know:

Maximize Your Business Expenses

Usually, business owners and self-employed taxpayers are able to use a much wider range of tax reduction strategies than individual taxpayers because of tax deductible business expenses. Some common business tax deductions include,

• the cost of acquiring and maintaining a vehicle for the business, and

The lower your net profit, the lower your self-employment tax will be, so writing off as many expenses as possible can help reduce your tax bill. Claiming business tax deductions can also lower both your income taxes and self-employment taxes, and you can deduct a portion of your self-employment tax payments on your personal tax return.

Recommended Reading: How Much Is Tax Preparation

Tax Deductions And Credits You Can Use To Reduce Business Taxes

The Internal Revenue Code is set up to provide numerous tax breaks to individuals and businesses alike. Even the IRS acknowledges that you must keep some money to live on and with which to run your small business.

Some small business tax savings strategies, like timing income and expenses, must be accomplished before the end of the tax year. But others, such as funding a retirement plan, can be done at any time before you file your tax return.

If you’re looking for ways to save money on your small business taxes, keep reading.

Contributing To A Retirement Account 401k Or Ira

By contributing to a 401k retirement account or individual retirement account , you can reduce your taxable income and lower the taxes you owe. Pre-tax money is deposited into the 401k account and growth is tax deferred. An individual retirement account offers similar benefits.

Following the Setting Every Community Up for Retirement Enhancement Act of 2019, seniors can now contribute to IRA accounts indefinitely. This new law also raised the age that seniors must take required minimum distributions from their 401 and IRA accounts. In the past, RMDs had to be taken at age 70 ½ the age has now increased to 72 years.

You May Like: How To Amend My Tax Return

Paying Taxes Is Never Fun But There Are Steps You Can Take To Reduce Your Business’s Tax Liability

• A tax liability is the tax debt you owe the federal, state or local government.
• Understanding what deductions you can make, what equipment to purchase and how to invest in operations can help reduce your tax liability.
• Tax credits can reduce your tax
• This article is for small business owners looking to better manage their taxes.

For most people, taxes are due April 15, but businesses must prepare taxes year-round. The decisions you make throughout the year impact your businesss tax liability. If this is your first year filing a business tax return, you might be nervous about how much you owe the government.

Make Smart Purchases And Investments

If youre going to invest in new equipment or services for your business, the timing of those purchases can affect your tax liability this year or next year, said Milkwick. Starting in January, plan out what youre willing to invest in before the end of the year.

If its November, and youre planning on purchasing equipment within the next several months for a business expansion, for example, it may make sense to accelerate the purchase before the end of the year to get the tax deduction in the current year, Milkwick told Business News Daily. same goes for services. If its toward the end of the year, and youre planning on a large marketing campaign over the next several months, it may make sense to prepay for some of the costs to take the deduction in the current year.

Happen to have spare cash to make bigger investments? Be sure to consider tax-friendly opportunities. For example, you can write off a significant portion of initial investments in areas like real estate and oil and gas, said Casey Minshew, CEO of EnergyFunders.

Oil and gas investments that pass through intangible drilling costs help reduce an investors taxable income, as they can take these costs as active deductions against their earned income, Minshew said. This can generate up to a first-year return of 30% based on tax benefits alone, even before a drop of oil has been produced.

These are also not deductible to the owner until the business spends the money, Milkwick added.

Read Also: Where Do You Pay Taxes

Fund Your Flexible Spending Account

The Internal Revenue Service allows you to channel tax-free dollars directly from your paycheck into your flexible spending account each year. Thus, if your employer offers an FSA, it is best to grab it and take advantage of this opportunity to lower your tax bill.

• In 2022, the limit of FSA rises to $2,850 from $2,750 in 2021,
• Youll have to use the money on your flexible spending account during the entire calendar year for dental and medical expenses. However, you might also be able to spend it on related everyday stuff such as pregnancy test kits, bandages, acupuncture, and breast pumps for yourself and your eligible dependents.
• Some employers might let you carry money over to the next calendar year.

Work Closely With A Financial Professional

A financial professional can help you see how different aspects of your finances, e.g., taxes, investments, and charitable giving, can work together to help you work toward your goals.

Browse our tax planning resources page for insights and information that can help you prepare and adapt to an evolving tax environment.

Mutual fund investing involves risk and principal loss is possible. Investing in certain funds involves special risks, such as those related to investments in small- and mid-capitalization stocks, foreign, debt and high-yield securities and funds that focus their investments in a particular industry. Please refer to the fund prospectus for additional details pertaining to these risks.

Read Also: Can You Pay Your Tax Monthly

How Can An Llc Pay Less Taxes

By separating salary from business profits, the owner saves a slight amount in taxes by avoiding payroll taxes on the amount received as an S-Corp distribution. But the S-Corp distribution business owners receive is taxed at normal, ordinary income tax rates according to their individual income tax bracket.

Strategy #: Maximize Your Tax

One of the most effective ways to reduce your tax liabilities is to increase your contributions to tax-deferred retirement vehicles, such as company-sponsored 401 or 403 accounts, government-sponsored Thrift Savings Plans or individual retirement accounts . If youre like many people, youve got room to increase your contributions before you hit the maximum allowable contribution.

If youre in a 401 or 403 account, that limit is $20,500 for 2022. If you have a SIMPLE account, the limit is $14,000, while the limit for a is $61,000. If you are turning 50 in 2022 or are already older than 50, you can sock away more due to catch-up contributions, which are $6,500 for 401s and 403s and $3,000 for SIMPLE IRAs. There are no catch-up contributions allowed for SEP IRAs, because contributions can only be made by employers not employees.

For traditional tax-deductible IRAs, which are accounts that you establish for yourself, contribution limits are $6,000 a year with $1,000 extra allowed for catch-up contributions for those turning 50 and older in 2022.

Figure 1: Impact of a 50% increase in 401 contribution at different times of the year

You May Like: Can You File Taxes For Unemployment

Utilize The Qualified Business Income Tax Deduction

The Tax Cuts and Jobs Act created the Qualified Business Income deduction when the law went into effect in 2018. You might be able to deduct 20% from your qualifying business income if your business is a pass-through entitya sole proprietorship, an S corporation, or a partnership, passing its income and deductions down to its shareholders, partners, or owners to report on their personal returns.

This deduction is in addition to claiming your ordinary business expense deductions. You should qualify if your taxable income is below a certain amountit was $164,900 for single filers and $329,800 if married filing jointly for the 2021 tax year. Special rules apply if you earn more than these amounts, so you might still qualify depending on the nature of your business.

The QBI deduction has some other restrictions and limitations, so check with your tax preparer about your eligibility.

Accelerate Capital Losses And Defer Capital Gains

If you have assets with an accumulated loss, it may be prudent to sell them before the end of the year. You can deduct capital losses up to the number of your capital gains + $3,000. If you want to sell an investment with an accumulated gain, it may be advisable to wait until after the end of the year to avoid payment of the taxes until the following year .

The maximum capital gains tax rate is 20% for most capital assets held for more than 12 months . However, dont forget to think about the assets investment potential. To maximize the economic benefit or minimize the loss, it may be advantageous to keep or sell the item.

Recommended Reading: How Do Tax Returns Work

Lower The Cost Of Health Insurance

With the continued rising cost of health insurance, opting for an HSA or Health Saving Account has tax advantages for both your company and your employees. An HSA is a medical savings account that affords tax benefits when your employees are enrolled in a specific health plan. The money that workers contribute to the HSA is not taxed at the federal level at the time of deposit.

On your side of the house, your HSA contributions to your employees are also tax-deductible as a business expense, thus reducing your tax liability. This has the benefit of reducing your payroll taxes. The more employees you have that make HSA contributions, the greater your tax savings.

Income Tax Calculator: Estimate Your Taxes

2. Retirement Accounts

Choosing the correct retirement plan and investment account is a very important and personal process. Your choice can depend on your retirement goals, financial situation, family structure and income source. Traditional 401 accounts and individual retirement accounts are among the most common, and it is critical to max out your investments on a yearly basis if you can. Contributions to these accounts can be deducted from your taxable income, lowering your year-end tax liability.

Business owners should strongly consider starting a retirement plan. There are several options in terms of accounts, including:

IRA or Roth IRA.

403.

Simplified Employee Pension plans.

For business owners with a one-participant 401 plan, the IRS allows business owners to contribute up to $58,000 in 2021. If you are an employee, contributions can come in the form of your workplace 401, 403 and even your health savings account . Contributions to your HSA account can be tax deductible. For 2021, the maximum HSA contribution is $3,600 for individuals and $7,200 for families. Additionally, the IRA contribution limit for individuals is $6,000 in 2021. If you are over 50 years old, you qualify for an additional catch-up contribution.

3. First-Year Bonus Depreciation

Place an emphasis on bookkeeping.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Read Also: Where Can You Do Your Taxes For Free Online

Minimize Taxes On Foreign Investments

Do you hold international securities in your investment accounts? Investors holding international securities are often subject to withholding taxes by foreign governments on investment income . If double taxation treaties exist between the country where you reside and where the issuer of the security is based, you may be entitled to reclaim all or some of these foreign taxes, but must do so within the statute of limitations. Talk to your Morgan Stanley Financial Advisor about foreign tax reclaim services.

Youre Our First Priorityevery Time

We believe everyone should be able to make financial decisions with confidence. And while our site doesnt feature every company or financial product available on the market, were proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward and free.

So how do we make money? Our partners compensate us. This may influence which products we review and write about , but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.Here is a list of our partners.

Recommended Reading: How To File Federal Taxes For Free

State And Local Tax Breaks

You may also be able to reduce your state and local tax burden.

Federal tax reform laws eliminated miscellaneous deductions however many states still allow them. In New Jersey, taxpayers can deduct the cost of medical expenses that exceed 2% of their adjusted gross income whereas on federal tax forms, medical expenses need to be in excess of 7.5% of your income to be deductible.

The tax savings here arent just for income taxes. For example, in New York City, there is a parking tax for some rented spaces. Residents can request an exemption and waive a portion of the fee.

Check with your local and state taxing authorities to see what deductions may be available.

Should I Claim 0 Or 1 If I Am Single

By placing a 0 on line 5, you are indicating that you want the most amount of tax taken out of your pay each pay period. If you wish to claim 1 for yourself instead, then less tax is taken out of your pay each pay period. … If your income exceeds $1000 you could end up paying taxes at the end of the tax year.

Don’t Miss: How To Get Tax Exempt Status For Nonprofit

Make A Charitable Donation To Offset The Tax Costs Of Converting A Traditional Ira To A Roth Ira

Converting a traditional IRA to a Roth IRA typically means paying significant taxes, but making a charitable contribution can help offset that income. This strategy may work if you already donate regularly to charity, have sufficient non-retirement assets to pay the cost of the conversion and would consider making a larger-than-usual charitable donation to Fidelity Charitable to establish a Giving Account in the year of the conversion.

Hypothetical tax amounts assume a 37% federal tax rate, a $500,000 Roth conversion amount and a $100,000 fully deductible charitable contribution. The federal alternative minimum tax, and state and local taxes are not taken into account.

Tips For Understanding Your Taxes

• A financial advisor can help you optimize your taxes for your investing and retirement goals. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free toolmatches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
• Worried about comprehending your taxes? SmartAsset has you covered with a number of free online tax resources to help you manage your taxes. Go online to our website and check out our income tax calculator today.
• If you dont know whether youre better off with the standard deduction versus itemized, you might want to read up on it and do some math. You might find that youd save a significant amount of money one way or another, so its best to educate yourself before the tax return deadline.

Don’t Miss: Can International Students Get Tax Return For Tuition

Profiting From Investment Losses

You can reduce your tax liability for the given year when you sell off investments that have declined in value since you purchased them. This strategy is often referred to as tax-loss harvesting. The IRS allows these investment losses to be written off against investment gains up to a certain limit each year. The limit is $3,000 or $1,500 if youre married filing separately.