ôô

8 Ways to Legally Pay Less Tax and Save Money

There are many ways to legally shelter your income from tax so you save money. Laura explains 8 ways to reduce your taxable income so you pay less tax. You can take advantage of some or all of them, no matter how much or little money you make, to keep more of your hard-earned money.

By
Laura Adams, MBA
Episode #491
8 Ways to Legally Pay Less Tax and Save Money

 

3. Start a business.

No matter if you want to create a tech startup that revolutionizes the world or just do a little freelancing work on the side, having a business is a great way to shelter more of your money from taxes.

For instance, if you start building websites or offering services as a virtual assistant, reasonable business expenses might include the cost of a computer, accounting software, and office furniture. If you’re a rideshare driver you could deduct a portion of your car payment, insurance, and cell phone bills.

If you’re trying to profit from your business—and not just engaged in a hobby—you can turn some of your personal expenses into allowable business deductions.

See also: 5 Retirement Options When You're Self-Employed

If you’re trying to profit from your business—and not just engaged in a hobby—you can turn some of your personal expenses into allowable business deductions.

4. Take the home office deduction.

If you operate a business from home, you’re eligible for even more money-saving tax deductions. You can claim a home office deduction whether you rent or own your home and no matter if it’s a full- or part-time venture.  

Maybe you use a portion of your bedroom, a large walk-in closet, or a detached garage to work, store inventory, or meet with clients. You can deduct 100% of expenses that directly affect the areas of your home used for business, such as repairs or installation of internet. But you can never deduct expenses that are completely unrelated to your home office, such as remodeling in other parts of your home or the addition of a pool.

You’ll have indirect expenses for your office that you would incur whether you had a home office or not, such as maintenance, insurance, utilities, real estate taxes, and depreciation. For these, you’re allowed to deduct a certain amount based on the size of your office as a percentage of your home, using either a standard or a simplified calculation method.

For instance, if your apartment is 1,000 square feet and you use a spare bedroom and bath that’s 120 square feet to work, then you have a home office space that’s 12%. The standard method allows you to deduct 12% of your total indirect expenses for business use.

Starting in 2013, the IRS introduced a simplified method to calculate your home office deduction. You just multiply your allowable square footage by $5. In general, you can only claim a maximum space of 300 square feet, which caps your deduction at $1,500 per year. So, if your office space is bigger than 300 square feet, or the deduction would add up to more than $1,500, you’d come out ahead using the original, standard method.

And if you’re an employee who works remotely from home because you don’t have the option to go to a local office, you can also claim a home office deduction. For more details check out IRS Publication 587.

See also: How to Make Money from Home

5. Contribute to retirement accounts.

One of the best ways to protect your income from taxes and accumulate wealth for the future at the same time is to contribute to one or more retirement accounts.

One of the best ways to protect your income from taxes and accumulate wealth for the future at the same time is to contribute to one or more retirement accounts.

There are accounts designed for individuals, such as a traditional IRA or Roth IRA. Many employees have the option to participate in a traditional or Roth 401k or 403b at work. And there are retirement accounts just for the self-employed too.

Different retirement accounts come with different rules and annual contribution limits. But the important points to remember are that traditional accounts give you an immediate, upfront tax deduction. You don’t pay any tax on traditional contributions or their earnings in the account until you make withdrawals in the future.

The other main type of retirement account is called a Roth—like a Roth IRA or Roth 401k. These have an opposite tax structure from traditional accounts because you do pay tax upfront on contributions, but the big benefit comes later when you take withdrawals of contributions and earnings in retirement that are completely tax free.

Free Resource: Retirement Account Comparison Chart (PDF download)

Pages

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

The Quick and Dirty Tips Privacy Notice has been updated to explain how we use cookies, which you accept by continuing to use this website. To withdraw your consent, see Your Choices.