Making A Plan To Reduce Tax Liability

We all want to keep our taxes as low as possible. However, with the constantly changing U.S. tax code, it can be hard to know if you or your business are paying more than you should. That’s why it’s a good idea to consult a tax attorney to make a plan. Of course, developing a plan to reduce your tax liability first starts with analyzing your current tax liability.

Reducing Individual Tax Liability

There are many ways to reduce your individual tax liability through planning.

Max out contributions to qualifying retirement plans

Contributions that you make to a 401(k) or an IRA are typically pretax contributions. That means you won’t pay taxes on the income until you make a withdrawal from your retirement plan.

Use Employer benefit plans like HSA and FSA accounts

If you have a high deductible health insurance plan, a health savings account or flexible spending account allows you to make pretax contributions to cover health and wellness expenses.

Time your itemized deductions

You can only take some itemized deductions, like medical expenses, if they make up a certain percentage of your income. In some cases, you can prepay expenses in one taxable year or delay paying until another taxable year to ensure you meet the threshold.

Use the gift tax exclusion

For example, in 2021, you could have given away up to $15,000, or $30,000 as a married couple, and avoided paying the federal gift tax. If you transfer money to someone who pays a lower tax rate, the overall tax burden decreases. In some cases, directly paying someone’s medical or educational expenses will also avoid the gift tax.

Consider tax-exempt bonds

Consider investing in municipal or state bonds. The interest from these bonds isn’t subject to federal income tax.

Reducing Business Tax Liability

You can also reduce your business tax liability through careful planning with a tax professional.

Review your business structure

Over the years, as your business evolves and tax laws change, the structure you started with may not be the best now and for the future. In addition to optimal tax structure, considerations include business size and objectives. Under the Tax Cuts and Jobs Act, which was passed in 2017, C Corporations are taxed at a much lower tax rate, 21%, than prior tax years. We continue to stay abreast of new tax laws so that we can help clients minimize their tax bills.

Build a retirement fund

If you are a small business owner, you can save up to a certain amount each year, i.e., $58,000 in 2021, a year tax-free in retirement contributions through a plan such as a SIMPLE IRA, Roth IRA, 403(b) or Simplified Employee Pension Plan.

Use contract or family member employees

If you employ contractors or family members, in some instances, you can avoid paying unemployment or FICA taxes.

Maximize deductions

As a business, you could take advantage of a wide range of deductions. For everything from office supplies to travel expenses, you can deduct “ordinary and necessary expenses” to reduce your business’s tax liability.

Hire An Experienced Tax Attorney

It’s never too late to reduce your tax liability with well-placed deductions or by putting money back into your business. When you’re ready to start tax planning to reduce your tax liability, you need professional help. The tax attorneys at the Law Offices of Beverly Winstead have years of experience assisting individuals and businesses with their tax concerns. To schedule a consultation at their Baltimore and Laurel, Maryland office, call 301-760-2003 or contact them online to schedule a consultation.