Many people could have been upset about the amount of tax they owed the IRS because the 2024–2025 filing season officially ended last month.
It can be particularly difficult to pay taxes at this time of year, especially if you are barely able to pay the IRS the balance you owe.
Most people want to lower their tax liability as much as possible, even if they can afford to pay their taxes. Thankfully, there are techniques to lower your tax burden that are legal.
The operation of pay-as-you-go income tax
The majority of people file their taxes at the end of the tax year, but they pay their taxes to the IRS throughout the year. This is to make sure you don’t have a single, sizable payment to make to the IRS at the end of the year.
This might be challenging if you work for yourself since you might find yourself in this situation if you don’t remember to set aside money for taxes at the end of the year.
The IRS mandates quarterly anticipated tax payments from self-employed people throughout the year due to this risk.
The vast majority of Americans pay their taxes by having them deducted from their pay cheques, pensions, or other government benefits.
The IRS advises paying at least 90% of your taxes in the year prior to the start of the filing season in order to prevent an estimated pay tax penalty, which occurs when you pay insufficient amounts of taxes during the year.
You can get your money back if you overpaid taxes to the IRS once filing season begins.
How to reduce your Internal Revenue Service tax obligation
The majority of individuals generally wish to pay as little tax as feasible. According to the IRS official website, most people are not happy about having to pay taxes, even though it is both a legal duty and your civic responsibility to disclose your earned income.
However, in order to maximise your earned income, there are several ways to legally reduce your tax liability.
Here are two strategies to lower your tax obligation:
- Contribute to an IRA
- Owners of assets may be able to claim a capital loss.
Contributions to traditional individual retirement plans may be tax deductible in the year they are made. Depending on the situation, different IRS rules apply to IRA contributions.
You can frequently deduct the whole amount of an IRA contribution if neither you nor your spouse are protected by retirement plans at work.
If you and your spouse are covered, your contribution may be limited by your adjusted gross income.
The effect of assets on your tax obligation
Asset owners can lower their tax obligations in a number of ways, not just by claiming a capital loss.
You must first sell the shares at a loss in order to use a capital investment loss, such as that from buying stock, to balance any capital gains you may have made and reduce your taxes. We call this “realising” a loss.
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If you own a business, which is an asset, you can lower your tax burden by reporting costs you had to pay to keep the business running, in addition to claiming a capital loss.
Purchasing large quantities of business-related items at the end of the year or giving staff incentives at the end of the year are examples of “bunching” your business-related expenses at the conclusion of the tax year.
