Yes, You Can Avoid Some Taxes With These 6 Solutions!

Benjamin Franklin once said: “nothing is certain but death and taxes.” If you don’t file your taxes, the IRS will notify you and you’re likely to be slapped with penalties and interest. You may even miss out on a tax refund. Paying taxes may be unavoidable, but most folks would probably choose not to give a part of their earnings to the government.

Income is taxed among three different levels of government: federal, state, and local. Also, earned income is subject to payroll taxes, and additional contributions to Social Security and Medicare.

Fortunately, there are ways to avoid some taxes. If you want to save some money, here are 6 ways to avoid a few taxes without breaking any laws.

municipal bonds
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1. Invest in Municipal Bonds

One way to legally avoid some taxes would be to start investing in municipal bonds. Purchasing municipal bonds is when you lend money to a state or local government in exchange for several interest payments over a set period of time. When the bond reaches maturity, you’ll be receiving the whole amount of the initial investment back.

Municipal bond interest payments are exempt from federal taxes and may also be tax-free at the state and local levels, depending on where you live. Municipal bonds are appealing to investors due to the tax-free interest payments.

Municipal bonds are known to rate lower than their global corporate bond counterparts. One study showed that, between 1970 and 2019, there was a 0.1% default rate for investment-grade municipal bonds, while global corporate issuers had a 2.25% default rate.

Usually, municipalities pay lower interest rates. Due to the tax benefits, the tax-equivalent yield of municipal bonds makes them quite attractive to certain investors. Basically, your tax-equivalent yield will increase as your tax bracket rises.

2. Go for Long-Term Capital Gains

Not only is investing a useful tool for increasing wealth, but it can also help you avoid some taxes. No matter if you choose to invest in stocks, bonds, mutual funds, and real estate, you’ll get some favorable tax treatment.

For instance, let’s say you’ve been owning a capital asset for more than a year. This means you’ll benefit from a preferential tax rate of 0%, 15%, or 20% on your capital gain, depending on your income level. If you decide to sell your capital asset before holding it for less than a year, the capital gain will be taxed at regular income rates. Understanding short-term versus long-term capital gains rates is essential for growing wealth.

This approach can help you avoid some taxes. Now, let’s create a possible scenario to have a better understanding of how it works.

John and Mary are married, and they have been owning a capital asset for more than a year. In 2022, they would pay no tax on their long-term capital gains if their taxable income were to be less than $83,350 — in case they decide to file jointly. Single filers can also avoid some taxes if their taxable income is less than $41,675.

An investment advisor or tax planner can tell you when and how to sell securities in order to maximize gains and minimize losses.

Tax-loos harvesting can also be used to reduce capital gains taxes by selling depreciated securities. If capital losses surpass capital gains, the net capital loss or the lower of $3,000 of the excess loss may be deducted to reduce the tax burden.

start a business
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3. Start a Business

Apart from earning extra money, a side business has several tax advantages. In order to stimulate the economy, the US government offers tax deductions for those who want to start a business. You can avoid some taxes and deduct up to $5,000 of your business startup costs.

Also, many business-related expenses such as housing, utilities, computer equipment, travel, and transportation can be deducted from income.

When it comes to self-employed individuals, one of the most important tax deductions is health insurance premiums which are available if certain conditions are met.

In addition, by properly following IRS guidelines, a business owner can avoid some taxes and deduct a portion of their home expenses through the home office deduction. The part of the internet and other utilities used in the business can also be deducted from the income.

To claim these deductions, business owners must run a profitable business. The IRS analyzes a number of variables, which are detailed in Publication 535. Those who have made a profit in 3 of the last 5 years are considered to be involved in a profitable business.

In 2019, the Setting Every Community Up for Retirement Enhancement — or SECURE — was enacted. This legislation provides tax breaks to employers who engage in multiple-employer plans and covers retirement savings plans for their employees.

Keep reading to find out about other ways to legally avoid some taxes!

4. Maximize Your Employee Benefits and Retirement Accounts

Contributions to 401(k) or 403(b) plans can lower taxable income up to $20,500 in 2022. Those aged 50 and over can increase their basic workplace retirement contribution by $6,500. For instance, if an employee earned $100,000 in 2021 and contributed $19,500 to a 401(k) retirement plan, his or her taxable income is reduced to $80,500.

Individuals without a retirement plan at work can still avoid some taxes. They have to make an annual contribution of up to $6,000 (or $7,000 for those aged 50 and over) to a traditional IRA. Depending on their income, taxpayers who do benefit from workplace retirement plans may be eligible to deduct some or even all of their traditional IRA contributions.

The IRA contributions deduction is phased out depending on several factors such as whether claimed on single filing status, married individual filing separately, joint return, and taking into account any contributions made by a taxpayer in another retirement plan. The IRS’s guidelines provide all the information you need to know.

health savings account
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5. Use a Health Savings Account (HSA)

Here’s another nice legal way to avoid some taxes. Employees who have an insurance plan with a higher deductible than a traditional one can use a health savings account to lower their tax liability.

As with a 401(k) plan, HSA payroll deduction contributions (the employer can choose to match a portion of these contributions) are exempt from the employee’s taxable income. Those direct contributions to an HSA made by individuals are 100% tax-deductible.

For 2022, the maximum deductible contribution level is $3,650 for individuals and $7,300 for families. These funds can increase without you having to pay taxes on the earnings. An additional tax benefit of an HSA is that you’ll avoid some taxes when you make withdrawals to pay for certain medical expenses.

6. Claim Tax Credits

The Earned Income Tax Credit is one of numerous IRS tax credits that lower taxes. For the tax year 2022, a low-income taxpayer may receive credits of up to $6,935 if they have three or more qualifying kids, and $6,164 if they have two. Those taxpayers who only have one child may claim credits of up to $3,733, while those who have no kids can receive $560.

The American Opportunity Tax Credit provides a maximum of $2,500 tax credit per year for eligible students throughout their first four years of higher education. There’s also Lifetime Learning Credit which provides a maximum of 20% credit of the first $10,000 in qualified costs or $2,000 per return.

Those lower-income folks who are planning to save for retirement can also qualify for the Saver’s Credit which is a tax benefit for employers who make contributions to a retirement plan, an IRA, or an ABLE account.

This said, even though taxes are inevitable, and we all should pay them, there are a few ways to avoid some taxes based on current law.

Here’s some extra tax-related info: 10 Ways to Cut Down on Taxes in Retirement.


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