Social Security and Medicare taxes are added to federal, state, and municipal income taxes. Taxes are hard to avoid, but there are ways to cut taxes.
Here are several that you may want to think about:
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Buy municipal bonds
Safe roads and public schools need government funding. These funds are raised by selling municipal bonds, or “munis.”
The benefit? The interest on a bond held until maturity is exempt from federal income tax and state and local taxes if you reside in the bond’s issuance city. Municipal bonds entice investors with tax-free interest.
Do not think a muni bond is tax-free. Munis are tax-free except in rare cases. A “de minimis” tax may apply if you bought bonds at a discount of less than 0.25%. Interest and profits from the discounted amounts are taxed as ordinary income, not at long-term capital gains rates, regardless of bond duration.
Municipalities have cheaper interest rates. Some investors like municipal bonds’ tax-equivalent yield because of tax advantages. Larger tax brackets give larger tax-equivalent yields.
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Seek long-term capital gains
Wealth may be built by investing. Stocks, mutual funds, bonds, and real estate provide advantageous tax treatment for long-term capital gains.
Depending on income, an investor who holds a capital asset for more than a year pays 0%, 15%, or 20% on the capital gain. If the asset is sold within a year, the capital gain is taxed at regular income rates. Understanding long-term vs. short-term capital gains rates helps build wealth.
The 2024 zero-rate bracket for long-term capital gains applies to married couples filing jointly with taxable income up to $94,050. The 2025 figure is $96,700. In 2024, singles must earn $47,025 and in 2025, $48,350.
A tax planner and investment adviser may advise on selling appreciated or depreciated stocks to maximize profits and reduce losses.
Selling stocks at a loss may reduce capital gains tax liabilities via tax-loss harvesting. If capital losses exceed capital gains, other income might be reduced by $3,000 or the net capital loss. Over $3,000 in capital losses may be carried forward.
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Begin business
Besides money, a side company has various tax benefits. Daily company expenditures may be deducted from revenue, lowering your tax bill. If certain conditions are satisfied, self-employed people may deduct health insurance premiums.
A company owner may deduct a portion of their home costs using the home office deduction if they fulfill IRS criteria. Business utilities and Internet may be deducted from income.
The taxpayer must operate for profit to obtain these deductions. To decide, the IRS considers various things. Taxpayers who make a profit in three or five years are deemed to be in business.
In 2019, the Retirement Enhancement (SECURE) Act was passed. This law provides tax breaks to firms that join multiple-employer programs and offer retirement plans.
You can also use modern tax accounting services like Norman accounting for self-employed to help reduce your bookkeeping costs.
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Maximize retirement and employee benefits
In 2024, 401(k) and 403(b) contributions up to $23,000 lower taxable income. Age 50 and older may add $7,500 to the standard employer retirement plan contribution in 2024. Contributing $23,00 to a 401(k) decreases taxable income to $77,000 for a $100,000 employee in 2024.
Those without a workplace retirement plan may contribute up to $7,000 ($8,000 for those 50 and older) to a regular IRA in 2024 to get a tax advantage. Depending on their income, taxpayers with employer retirement plans (or their spouses) may be eligible to deduct part or all of their conventional IRA contributions.
If IRA contributions are claimed on a single, joint, or married person filing separately, the deduction is tapered off at various adjusted gross income levels. Taxpayer involvement in other plans is considered. Deduction guidelines from the IRS are specified.
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Use an HSA
HSAs may lower taxes for high-deductible health insurance employees. Employees’ payroll-deducted HSA contributions are tax-free like 401(k) payments. Direct HSA donations are 100% tax-deductible against income.
The 2024 maximum deductible contribution was $4,150 for individuals and $8,300 for families. The 2025 values are $4,300 and $8,550.
Employers may match HSA donations. The gains from these funds may grow tax-free. HSA withdrawals for eligible medical costs are also tax-free.
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Get tax credits
Tax credits may be the best tax benefit.
Say your annual income was $50,000. Spend $8,000 on IRS-friendly deductibles. If no long-term capital gains are involved, $42,000 will be taxed at your usual rate.
You may potentially qualify for tax credits. Their value is $5,000. Your $5,000 doesn’t lower your taxable income. It comes off your $42,000 IRS tax. A dollar-for-dollar benefit.
Important: In a 24% tax bracket, a $1 tax deduction is worth 24 cents. Dollar tax credits are worth dollars.
The verdict
Paying all taxes is necessary, but none should pay more. A few hours on IRS.gov and credible financial information sites might save hundreds or thousands of dollars in taxes.
Consider with a tax expert before claiming them on your return. You’ll want to be sure you qualify once all the complicated regulations are applied, then enjoy your savings.
