Ways to Reduce Tax Liabilities

Strategic Tax Accountants
Nov 27, 2023
3 min read

What are tax liabilities? Tax liabilities are the total taxes owed on your annual income. Although taxes are mandatory, you can reduce them through strategies like using tax credits and deductions, increasing retirement contributions, and making charitable donations, thus effectively lowering your tax burden.

1. Take Advantage of Tax Credits and Deductions

Tax credits and deductions are key to reducing your tax bill, as they lower your taxable income. With many available options, you might find new ones to apply to your taxes that you weren't aware of before.

Some of the most common tax liabilities are:

Earned Income Tax Credit (EITC): A refundable tax credit for low to moderate-income individuals and families.'

Child Tax Credit: This credit provides a financial benefit for each qualifying child. Child and Dependent Care Credit which helps offset the cost of child and dependent care expenses while you work or look for work.

Educational Expenses Deductions: You can deduct student loan interest and, in some cases, tuition and fees for higher education.

We believe the best way to make sure you are taking full advantage of all of the tax credits and deductions that may be available to you is through assistance from a tax professional.

2. Retirement Accounts

Contributing to retirement accounts such as 401(k)s and IRAs can have a double benefit: saving for your future while reducing your taxable income in the present.

401(k): A 401(k) is an employer-offered retirement savings account. Contributions are made with pre-tax dollars, reducing your taxable income. Additionally, many employers provide matching contributions, effectively giving you free money towards your retirement.
IRA (Individual Retirement Account): Traditional IRAs offer tax deductions on contributions, reducing your taxable income. Additionally, there are Roth IRAs, which don't offer immediate tax benefits but allow for tax-free withdrawals in retirement.

3: Managing Healthcare Costs

In the United States, you can itemize and deduct eligible medical expenses that exceed %7.5 of your adjusted gross income (AGI) as of 2023.

Qualifying expenses include:

Doctor's visits and medical treatments
Prescription mediations
Dental and vision care
Hospitals and Nursing Home care

Utilizing a Health Savings Account (HSA) would also be very beneficial in saving on taxes.

HSA Definition

A type of savings account that allows you to set aside money for qualified medical expenses. This usually aids families with high-deductible health insurance plans (HDHP) and it also offers a variety of tax benefits to aid in managing healthcare costs.

Criteria for HSA Eligibility

To have a Health Savings Account, you must meet the following criteria

Be covered by an HDHP.
Not be covered by another health plan that is not an HDHP.
Cannot be covered by Medicare.
Cannot be claimed as a dependent on someone else's tax return.

If you have to claim an individual as a dependent, then that individual cannot claim a deduction for an HSA contribution.

Qualified Medical Expenses

Funds in your HSA can be used for a wide range of qualified medical expenses, including but not limited to:

Doctor's visits and hospital fees
Prescription medications
Dental and vision care
Medical equipment and supplies
Long-term care premiums
Certain over-the-counter medications
COBRA health insurance premiums

4. Charitable Contributions and Tax Deductions

Donating to charity not only supports those in need but can also lower your tax bill. Many countries offer tax incentives for charitable donations.

Tax-Deductible Charitable Contributions: By making donations to qualified charities, you can reduce your taxable income. To claim this deduction, it's essential to keep accurate records of donations which can include receipts and acknowledgments from the charitable organizations.

Disclaimer: While we don't endorse giving to charity solely for personal benefit if charitable donations are a part of your life, we offer information to help you be tax-efficient in the process.

5. Real Estate Tax

In the realm of Real Estate, several tax-saving benefits and deductions are up for grabs including deductions related to personal property, capital gains, and rental properties!

Personal Property Deductions

Mortgage Interest Deduction: One of the most significant tax benefits of owning real estate is the mortgage interest deduction. You can deduct the interest you pay on your mortgage loan, up to certain limits. This can result in substantial tax savings, especially in the early years of your mortgage when interest payments are highest.

Home Office Deduction: If you use part of your home exclusively for business purposes, you may qualify for a home office deduction. This deduction allows you to write off a portion of your home-related expenses, such as mortgage interest, property taxes, insurance, and utilities.

Property Tax Deduction: You can deduct property taxes paid on your primary residence as well as any other properties you own.

Capital Gains

Capital Gains Exclusion: If you sell your primary residence and meet certain criteria, you can exclude up to $250,000 of capital gains from your taxable income ($500,000 for married couples filing jointly), which can provide significant tax savings when selling your home.

1031 Exchange: Real estate investors can use a 1031 exchange to defer capital gains tax when selling one investment property and buying another of equal or greater value. This allows you to reinvest the proceeds without incurring immediate capital gains taxes.

Short-Term vs Long-Term Capital Gains: How long you hold real estate can impact the tax rate you pay on any capital gains. Short-term capital gains (realized within one year) are typically taxed at your regular income tax rate, while long-term capital gains are usually subject to lower tax rates.

Rental Property

Mortgage Interest Deduction applies here as well! If you own rental properties, you can deduct various expenses, including mortgage interest, property management fees, repairs, maintenance, and depreciation.

Energy-Efficient Tax Credits: Some energy-efficient home improvements, like installing solar panels or energy-efficient appliances, may qualify for tax credits, reducing the overall cost of these upgrades.

Please keep in mind that these are just a few of the many tax-saving options available!

BONUS: Tax-Efficient Business Strategies

We can't leave out our business owners! If you're a business owner, there are strategies for reducing your tax liability as well:

Maximize Deductions: Ensure you're taking advantage of all available business deductions, such as expenses related to running your business (equipment, rent, advertising, etc.), travel expenses, vehicle expenses (for vehicles used solely for your business purpose, employee benefits, and more.
Choose the Right Business Structure: Different business structures have different tax implications. Options include sole proprietorships, LLCs, S corporations, and C corporations. The right structure can minimize your tax liability. For more information on business structures and their tax implications, check out our "Business Entities and Taxation Types" blog!

Business Entities and Taxation Types Blog

Important Reminders

Stay informed of tax law changes: Tax laws are complex and subject to change, so staying informed is crucial. Make use of reliable sources for tax information and updates.
State Tax Rules: Remember that state taxes can significantly impact your overall tax liability, so be mindful of state-specific rules and opportunities.
Consult with a tax professional: Consider consulting with tax professionals or financial advisors to create a tax-efficient plan tailored to your specific circumstances.