Best Ways to Minimize Your Tax Liability

As the old saying goes, “Nothing is certain except for death and taxes.” Not much can be done about the former, but for the latter, something can certainly be done to minimize tax liability. Having a tax reduction strategy is not something reserved for the wealthy, or those looking to exploit suspect loopholes in the tax code; rather it is a strategy that can be employed by anyone who is willing to follow a few simple rules.

Retirement Account Contributions

For taxpayers who have retirements accounts or have the ability to start one, contributions to retirement accounts offer a double bonus. First, by contributing to a retirement account, the saver realizes a long-term financial benefit. Second, contributions to a retirement account offer an excellent tax reduction tool. These tax reduction benefits derive from the fact that any amount paid into the retirement account from taxable income is deductible and reduces your total taxable income. In addition to diverting taxable income away from being taxed and into a retirement account, contributors to a retirement account may also be able to claim a retirement saver’s credit for single filers and for joint filers.

Health Savings Account

A health savings account allows for a person to pay for current health care expenses and save for those in the future by contributing to a special savings account dedicated to health care expenses. Contributions to a health savings account can help individuals who participate in a high-deductible health plan.

In addition to shielding income from being exposed to tax liability, contributions to a health savings account can roll over indefinitely without being taxed—similar to assets held in a retirement account. From a tax savings perspective, contributions to a health savings account present an attractive tax savings option since contributions to a health savings account are tax-deductible if made through a payroll deduction. Since a contribution to a health savings account is made pre-tax, it reduces the amount of taxable income on their paycheck. Secondly, since health savings accounts earn interest, the saver not only gains a benefit from interest accumulation, but this interest is also earned tax-free. Thirdly, health savings account owners may also make tax-free withdrawals for qualified medical expenses. Qualified expenses include nearly all mainstream preventative, diagnostic and treatment services as well as prescriptions.

Deducting Job-Related Expenses

One tax saving strategy for those who are self-employed or own a small business involves deducting job-related expenses and other out of pocket expenses that are common for the type of work being done. These deductions can reduce one’s taxable income through offsets for expenses or depreciation.

When combined with other deductions offered to taxpayers these tax strategies can go a long way in reducing one’s tax liability.