If you are getting a tax refund and you don’t need the money for anything essential right now, you might feel a pull to use it to treat yourself. However, you might want to consider skipping it, as a tax refund provides a great chance to set yourself in a better position for the future. If you’re getting a windfall, there are many great ways to assure your money continues to work for you.
In this article, we will go through some of the most effective ways to handle your taxes.
Invest in Municipal Bonds
Buying a municipal bond essentially means lending a specific amount of money to a local governmental entity for a fixed number of interest payments over a period that is previously determined. Once the bond approaches its maturity date, the amount of the original investment is paid to the buyer. Municipal bonds have lower default rates than corporate bonds and typically pay lower interest rates. What makes them attractive to some investors is potential tax-free interests. Interest on these bonds is excluded from federal taxes and may be tax-exempt at the state and local level as well, depending on your location.
Start Investing Long-Term
For some people, Investing is one of the most essential tools in growing wealth. An additional benefit from investing in stocks, bonds, mutual funds, and real estate is the highly convenient tax treatment for long-term capital gains. An investor holding a capital asset for longer than one year enjoys a preferential tax rate of up to 20% on the capital gain. If the asset is held for less than a year before selling it, the capital gain is taxed according to the ordinary income rates. Understanding the differences between long-term and short-term capital gains rates is vital for growing wealth. An investment advisor can help determine when and how to sell assets and advise on how to minimize gains and maximize losses.
Start a Small Business
Starting a side business can be a great source of additional income. Besides that, it offers many tax advantages. When used on a daily business, many expenses can be deducted from income, including health insurance premiums which are available if special conditions are met. By scanning your bank and credit card statements, you can file directly through Keeper Tax, an online platform designed for tax filing and expenses tracking. By following IRS guidance, as a business owner, you might be able to deduct part of their home expenses through the home office deduction. The portion of utilities and Internet used for the business, even though the work is done from home, may also be deducted from income.
Become an Independent Contractor
For certain small businesses including sole-proprietorships, partnerships, LLCs, and S Corps, you might be rewarded a special 20% deduction. Perhaps you can consider changing your employment status to an independent contractor so you can take advantage of this new benefit. There are a few tips to have in mind here, one of them being that this deduction doesn’t apply to income received as a salary. There are all kinds of limitations, so you will need to be extra careful about this one and research it thoroughly before quitting your day job altogether. In case you already run a small business, this one could most certainly save you a lot of income taxes.
Solar Power Credit
There are many benefits of switching to solar energy, including saving money on electricity while being environmentally friendly. Using energy that comes from the sun and converting it to electrical power we can use, will benefit you in more ways than it’s obvious. Installing solar panels is giving you 30% credit which is available only if you install them on your residence for residential electricity. An important thing to remember here is that a tax credit that directly reduces your income tax is more valuable than a tax deduction which simply reduces your taxable income.
Retirement Saving Plan
Those who don’t have a retirement plan at a workplace are allowed to get a tax break by contributing up to $6,000, or $7,000 if they are older than 50, to an IRA (traditional individual retirement account) in 2021. Taxpayers who do have retirement plans or at least whose spouses do can deduct a part or all of their traditional IRA contribution from taxable income, which depends on their income. The IRS has specific rules about whether and how much you are allowed to deduct, so you have to be very careful with it.
Even though it is necessary to pay all that is legally owed to tax authorities, nobody has to pay anything more than that. Hopefully, this article has answered the main questions about how to most effectively handle your taxes, and help you decide which one is the best option for you.