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Four ways taxpayers decrease tax liabilities.
Liudmila Rubtsova, March 30, 2021
You should try to maximize your retirement contributions either via your employer’s sponsored 401K, your IRA (Individual Retirement Account), and/or your business established retirement account such as Simple IRA or SEP IRA. Contributions to retirement accounts not only help you to save money for future, but also decrease your taxes in the short run as the majority of retirement plans are tax deductible. In case you are in 22% Federal and 3% State tax brackets. Contributing $10,000 into 401K or Simple IRA can save you $2,500 in taxes. You can contribute now (till April 15) and decrease your 2020 year taxes. For this year IRA contribution limits - $6,000 under age 50, $7,000 age 50 and over.
If you have children under 18 years of age who help you in your business you can pay them salary up to $12,400 and it will be tax free income to them and deductible for your business. For example, you operate your business as self-employed. Your income will be subject to income tax (Federal 22% and State 3%) and self-employment tax of 15.3%. If you pay your kids $12,400 you can save up to $4,997 ($12,400*40,3%). Please keep in mind that this is highly audited area and documentation to proof that your children work for you is required.
If you have high deductible health insurance plan, you can maximize your HSA account by 04/15/21. The maximum you can contribute to HSA for 2020 is $3,550 for self-only individual plan and $7,100 for the family. If you are 55 years or older, there is additional $1,000 catch up contribution available.
If you own a business and use your house for your business meetings or rental purposes not exceeding 14 days, your rental income will be tax free. Income earned from the rental activity will be tax free to you personally, and your business will get a tax deduction.