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.
6. Contribute to medical savings accounts.
An FSA can only be offered by employers. You and your employer can make contributions that are tax-free if they’re spent on qualified medical and childcare expenses by a certain deadline.
Anyone who has a qualified high deductible health plan, through an employer or on your own, is eligible for an HSA. It’s like an FSA, except that it doesn’t have a spending deadline. Any unused funds roll over from year to year in an HSA and eventually can be used like a retirement account after age 65.
Both accounts are fantastic vehicles to shelter your out-of-pocket medical expenses from taxes. Check out IRS Publication 969 for more information.
7. Become a homeowner.
In addition to being a real shelter, real estate is a powerful tax shelter, too. When you purchase a home for your primary residence you cut taxes the year you buy it, every year you own it, and even on the back end when you sell it.
When you purchase a home for your primary residence you cut taxes the year you buy it, every year you own it, and even on the back end when you sell it.
Homeowners can deduct costs like mortgage points paid on a loan, your mortgage interest, private mortgage insurance, and property taxes from their taxable income. And if you tap into your home’s equity with a loan or line of credit, you may also be able to deduct some of the interest you pay on that debt, too.
If you decide to sell your main home, and have lived there for at least two years, you get to keep up to $250,000 of capital gains or profit on the sale tax free. If you’re married and file a joint tax return, double that amount for an impressive $500,000 you get to keep tax free.
8. Hire a tax professional.
While hiring a tax pro does cost money, it’s been my experience that it’s one of the best ways to save. A good accountant can find additional tax deductions or credits you’re eligible for, help you make decisions, and keep you organized so you never pay more tax than you should.
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