How to Minimize the Impact of Income Taxes on Your Finances
No one likes to pay taxes, but they are a necessary part of life. The good news is that there are ways to mitigate the impact of income taxes on your finances. In this blog, we will discuss some of the best ways to do just that!
What are income taxes?
Income taxes are levied on the income of individuals and businesses. The amount of income tax that you owe depends on your income level and filing status. Income taxes are used to fund public services, such as education and infrastructure.
How can I reduce my income taxes?
Whether you are an active or passive income earner, here are several ways that you can reduce your income taxes. Some of the most common methods include:
- Taking advantage of tax deductions and tax credits: There are many different deductions and credits that you may not realize you can obtain. By taking advantage of these, you can lower your taxable income and owe less in taxes.
- Investing in a retirement account: Retirement accounts, such as a 401(k) or Traditional IRA, can help reduce your taxable income. This is because the money that you contribute to these accounts is not taxed until you withdraw it in retirement. You can also choose to invest in a Roth IRA, and pay the taxes now, but none when you withdraw the money in retirement.
- Giving to charity: Donating money to a qualified charity can also help reduce your taxes. This is because you can deduct the amount of your donation from your taxable income.
The Trump Tax Cuts
The Trump tax cuts are a series of tax cuts that were enacted by the Trump administration in 2017. The most notable changes include a reduction in the corporate income tax rate from 35% to 21%, and a reduction in the top marginal income tax rate from 39.60% to 37%.
While the Trump tax cuts have reduced income taxes for many people, there are some negative impacts as well. The most notable of these is the increased standard deduction reducing the value of certain itemized deductions.
What does this all mean for you?
Income taxes are a necessary part of life, but there are ways to reduce their impact. By taking advantage of deductions and credits, investing in a retirement account, and giving to charity, you can minimize the amount of taxes that you owe. The Trump tax cuts have also reduced income taxes for many people. However, this reduction is schedule to end in 2025 and with the national debt skyrocketing, many people expect additional increases in the future. When it comes to your finances, it is important to consider both the short-term and the long-term impact of income taxes.
Ways To Mitigate the Impact of Income Taxes
When it comes to your finances, knowledge is power. Stay informed and be sure to consult with a tax advisor if you have any questions. With careful planning, you can minimize the impact of income taxes on your finances!
Use these tips to help you make the best decisions for your financial future.
- If you are in a low tax bracket, consider investing in a Roth IRA. With a Roth IRA, you pay taxes on the money you contribute now, but all future withdrawals are tax-free.
- Consider contributing to a traditional IRA if you are in a higher tax bracket. With a traditional IRA, you pay taxes on the money you withdraw in retirement.
- Consider investing in tax-advantaged accounts such as a 401(k) or 403(b). The money you contribute to these accounts is deducted from your taxable income.
- If your employer offer’s a Roth 401k plan, consider paying a bit more in taxes now and contributing to that plan instead of the traditional 401k.
- Take advantage of tax deductions and credits. There are many deductions and credits available that people are unaware of that can reduce your tax bill.
- Talk to a tax professional. They can help you identify ways to reduce your taxes.
For more information on mitigating the impact of income taxes, listen to Episode 36 of our podcast Your Financial Advocate. This episode features special guest Jason Pueschel, Founder and Managing Director of Alternative Wealth Management.