Taxes are difficult to avoid, but there are many strategies you can find to help ward them off a bit. Here are a handful of ways to protect your income.
You get your paycheck and see the nice big “gross” income number on top of the pay stub. Scroll down a bit and you’ll notice that the “net” or actual amount that is deposited into your checking account is significantly smaller. That’s because your earned income gets taxed in many ways — federal, state, Social Security, Medicare and more. Taxes are difficult to avoid, but there are many strategies around to help ward them off a bit.
Here are six top ways to protect your income from taxes. (For related reading, see: How to Avoid the Six Most Common Tax Audit Triggers.)
If you have savings or investments, there are ways to avoid taxes on the income from those investments. Most municipal bonds are federally tax-free. When you buy an individual municipal bond or a municipal bond fund from your own state, then the interest payments from that income are also tax-free. The downside of municipal bonds may be the lower income than from comparable taxable bonds. Find out by checking the bond’s tax equivalent yield.
Long-Term Capital Gains
Investing can be an important tool in growing your long-term wealth. An additional benefit from investing in stocks, bonds and real estate is the favorable tax treatments for long-term capital gains. When you invest in mutual funds and individual financial assets, own them for longer than one year and then subsequently sell for a profit, you pay a lower capital gains rate on the money earned. The rate may be as low as zero for those in the 10% or 15% tax bracket. This is an excellent strategy to both improve your financial situation and your tax liability.
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