How to Reduce Your Taxable Income?
Imagine getting a rise in your profit earned but losing most of it on taxes. This is the situation of most business owners and employees who work hard to earn extra dollars but get bumped into extra taxes.
For someone who is dealing with this issue in Pompano Beach, where the sales tax rate is 0%, the country and state tax rate fluctuations become a headache for small business owners.
Understanding the income pattern to analyze the best way to reduce taxable income becomes important.
To help you in this scenario, a Virtual accountant for small businesses in Pompano Beach, FL, understand your business profits and figure out the best method out of the below-mentioned methods to reduce taxable income.
5 Tips To Reduce The Taxable Income –
- Start your side business.
A side business is beneficial when you want to deduct your taxable income and smartly get tax advantages.
You can do this by showcasing your expenses as a part of routine expenses. However, keep in mind the business should be run with the intention of profit generation to become eligible to claim this tax deduction.
For instance, you can start your swimming classes near the beach since visitors to Pompano Beach often come during vacations for adventure activities like swimming, sea diving, etc, in the gentle waves of the sea.
- Come forward for charitable contributions.
If you are looking forward to making charitable contributions, then you can lower your taxable income by strategizing your charitable amount. You can analyze your business growth to understand when you might hit the highest tax bracket and wait to carry the deduction to the next year.
Moreover, donations of cash and gifts provide tax deduction if the recipient is a 503(c) (3) charitable organization. If you cannot deduct your charitable income in a single year, then you can carry it forward for up to 5 years till it expires.
- Maximise contribution to your IRA and 401 (k) account.
The yearly contribution to retirement plans like 401(k) and IRA helps reduce taxable income. Every dollar you contribute to your 401(k) account becomes ineligible for tax at the moment, resulting in lower tax bills.
Furthermore, if you are a high earner and stay in a high tax bracket zone, then you might be ideal for the Roth 401(k) contribution. This will help you minimize your tax deduction to the lowest.
- Utilize the child tax credit.
The child tax credit is another smart way to deduct tax. You can enter your child on Form 1040, a US individual income tax return. This way, you can avail yourself of a $2000 benefit if your children are younger than 17.
The maximum refundable child tax credit is $1600 per dependent, and it is reported to increase to $1800 for the current filing season, making the child tax credit a perfect way to reduce taxable income.
- Cut off the travel expenses.
You can deduct taxes from your travel expenses if travel is a part of your business. However, these travel expenses have to be strictly limited to your business, and you must have incurred them through necessary travel for business purposes. While calculating your income, these taxes will be deducted from income from other sources.
