Mastering Basic Tax Types and 9 Proven Strategies for Tax Reduction

Tax:

Tax is the amount of money which individuals or companies have to pay to the government in return for public work and services.  This way the government finances the infrastructure work for healthcare and social security, and boasts the country’s economy. The percentage of tax deductions varies based on an individual's income. Usually, The federal government allocates a separate department for tax collection. For the United States, it is the Internal Revenue Service (IRS). Paying tax is an obligation. The law condemns tax evasion. Thus, facing legal consequences is inevitable for individuals who neglect this responsibility. However, benefitting from the law loopholes and optimizing net income is not only permitted but also completely legal. Tax laws vary from country to country and everyone needs to learn it before they start earning or doing business there.

Types of Tax:

Some common types of tax are as follows:

• Income tax: A type of tax which the government imposes on the income generated by individuals and businesses.
• Payroll tax: Payroll tax is a certain percentage of an employee’s pay deducted by the employer and paid to the government in regard to medical and security funds.
• Corporate tax: Fee deducted from the profit of businesses.
• Sales tax: Duty fee implied on the selling of certain goods and services but it varies by area.
• Property tax: The tax on the property owned by individuals like land, car, ship or boats comes under Property tax. However, it depends on the property’s value. 
• Tariff: A tariff is a fee imposed by the government on imported goods to protect local businesses.
• Estate tax: Levy imposed on the estate after a person’s death usually at the time of property transfer. The government imposes it on the surplus amount of current market value beyond the specified threshold.

Tax Reduction Strategies:

Waving off tax completely is impossible but it can be reduced through certain strategies. Following are some of the ways you can protect your income and reduce tax:

1. Investment in Municipal Bonds:

Government-issued bonds are referred to as municipal bonds. This means, when you're buying a municipal bond, you're lending out money to the government. The government funds different infrastructure projects through this money. These are riskless i.e. non-defaultable, tax-free bonds as issued by the government. Hence, attracting investors. One thing to remember is that since these are less risky, they have lower returns as compared to corporate bonds.

2. Charitable Donations:

Consider going for charitable donations. You can avoid capital gain tax on the sale of your donated property while taking deductions from the market value.

3. Long-term Financial Gains:

Assets like stocks, bonds, funds and real estate have favourable tax policies and laws. When keeping these for more than a year, one has to pay fewer fees as compared to short-term asset levy rates. Understanding and benefitting from these short and long-term gains are important. You can also take the help of an investment advisor and tax planner to maximize your gains. 

4. Become Self-Employed:

Owning a business or being self-employed helps in reducing total tax obligations. Deductions on expenses like the health insurance premium and home office can be claimed if you're running a profitable business for the last 3-5 years. Similarly, programs like the SECURE Act offer tax incentives to businesses offering a retirement plan to their employees.

5. Estate Planning Strategies:

You can minimize estate and gift duties by thoroughly reviewing and then updating your estate plan.

6. Use Health Savings Account:

Health savings account (HSA) reduces taxes on employees having high-deductible health plans (HDHP).

7. Retirement accounts and benefits:

Retirement accounts like a 401(k) or 403(b) plan reduce your taxable income. If your workplace doesn't offer these plans, go for a traditional individual retirement account (IRA).

8. Investment in opportunity zones:

Opportunity zones are distressed areas/communities where the government wants to grow the economy. Therefore, the government provides tax benefits to the investors. 

9. Claim Tax Credits:

You can claim tax credits on various schemes to reduce your duty fees. Low-income employees can claim  Earned Income Tax Credit. Similarly, individuals looking for retirement plans but having low income can opt for  Saver’s Credit. The American Opportunity Tax Credit and the Lifetime Learning Credit provide tax reductions to students. The Child and Dependent Care Credit helps reduce the levy on people looking for child care and disabled dependents.

Conclusion:

Paying the rightful amount to tax authorities is crucial but save what you can legally. You can employ various strategies to lower your tax expenses. By employing these tactics, you have the potential to retain tens of thousands of dollars in tax savings annually. Furthermore, as time goes on, these accumulated savings can develop into a significant sum. Nevertheless, understanding the tax consequences and their risks is crucial before entering any such scheme. Additionally, seeking guidance from professionals is of paramount importance.

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