11 Simple Ways to Avoid Paying Taxes Legally in The US

You might have heard the saying that says; nothing is certain in this world except death and taxes. You cannot avoid paying taxes legally in the US income earned; however, there are various means to reduce them to a certain extent. In this article, we are exploring to browse through the amour of tax avoidance legally in the US And See 11 Simple Ways to Avoid Paying Taxes Legally in The US.

There are good ways of avoiding paying taxes by following the rule book; however, this would not be a complete list.

These are some of the easiest ways to avoid paying taxes that is possible.

Reduce Taxable Income

Earn less to pay less tax. In easy words, there is a variation between what you earn and what the government recognizes as an income.

Let us now, begin with the 11 simple ways to avoid paying taxes legally:

1. Contribute to a 401(k)

401(k) Offer higher contribution limits; the retirement accounts are the undisputedly means of tax avoidance. For 2021, a 401(k) plan allows you to contribute up to $19,500 that adds more to your retirement savings.

The contributions made by you to the 401(K) account reduce your taxes, and your investment keeps growing tax-free until you retire.

This fund is easily accessible to the majority of the people, thus helping you pay less tax upfront.

The added benefit is that many employers also match their contribution to your 401(k) contributions; in fact, you get money for free.

Required Minimum Distributions” (RMDs)

The next issue is to know about RMD and how to avoid taxes on it.  You have to commence making “Required Minimum Distributions” (RMDs) when you attain the age of 70 years and six months.

2. Health Savings Account (HSA)

A Health savings account is personal savings account that you can utilize for paying your everyday medical expenditure.

There is a limit to the amount you can deposit in an HSA, but if you are registered with Medicare, you are not eligible to operate an HSA.

HSA limits are subject to change; at present, the limits announced by the IRS are $3,600 for single users and $7,200 for family coverage in 2021.

3. Don’t Sell Assets

Maintain a particular time gap between selling your assets, rather than liquidating a significant portion of your assets in one single year, space out, If possible, to delay the sale when your income is the lowest.

To avoid paying taxes on investments, hold on to your assets until your income position improves. Thus, you can steadily stay in the same income tax bracket even though you earn more money.

4. Flexible Spending Account

Check with your employer if they offer you a flexible spending account (FSA).  FSA lets you channelize your money directly to the tax-advantaged account from your paycheck.  Out-of-pocket medical expenses can be met by using the FSA account at certain stores specializing in FSA-eligible items.

Keep in mind that if you d not utilize this money in the account by the close of the year, the amount lapses and is sent back to your employer.

However, the employers have the option to grant you an additional two and a half months to spend the money or carry over up to $500 to the subsequent year.

 5. Delay the Bonus Check

Receiving a bonus check at the end of the year is thrilling, but the fat amount significantly moves you into the next higher tax bracket. It is best to request your employer to postpone collecting the check till January of the following year. Thereby, you avoid increasing your income and still get your money.

6. Mortgage Interest

You are eligible to deduct the interest amount you pay on the mortgage from your income. Up to $1,000,000 of your first and second mortgage can be removed.

Claim Applicable Tax Credits

A standard tax deduction of $12,550 for the tax year 2021 and $12,400 for the tax year 2020 applies to you. However, any income below that is not taxable.

In addition to deductions, you may qualify for several tax credits.

Remember deductions reduce your taxable income, while tax credits reduce the amount you owe in taxes.

Individual Tax Credits

Let us now understand about the individual tax credits are :

  • Child Tax Credit
  • Earned Income Tax Credit
  • Residential Energy Credit
  • Opportunity Tax Credit
  • Lifetime Learning Credit

7. Child Tax Credit

You are entitled to up to a $2,000 credit on your tax bill for every child may. In case you have dependents, then you qualify up to $500 per dependent.

8. Earned Income Tax Credit (EITC)

A few more opportunities to avoid paying income tax legally are:

  • Less than $3,650 in assets
  • Filing tax returns jointly if married
  • This option is not permitted if you complete Form 2555 or 2555-EZ. You earn at least $1 of income in the tax year.

The EITC is applicable between $543 and $6,728 and on the number of dependents for the tax year 2021.

9. Residential Energy Credit

Residential energy credit is a federal tax credit towards the installation costs of solar energy systems and is 22% for the year 2021. You are allowed to carry forward any unused portion of the credit to the subsequent tax year.

10. American Opportunity Tax Credit

You can avoid paying tax legally in the US through the American Opportunity Tax Credit; this is one of the most significant tax breaks.

If they cover their children’s educational expenses, the tax bill reduces up to $2,500 for undergraduate costs for those students’ parents. It covers $2,000 you spend on school books, fees, and equipment for the initial year and $2,000 subsequent year onwards.

However, American opportunity credit is not an excellent option for high earners to avoid paying income tax legally,

11. Lifetime Learning Credit

The Lifelong Learning Credit reduces your tax bill by up to what you spend on education. That is 20 per cent on the first $10,000 you spend on tuition and educational fees. You can declare it for any number of years. Also, this credit is not refundable.

Conclusion

Expectantly, by now, it might have been clear to you the 11 simple ways to avoid paying taxes legally in the US. It is advisable to consult a tax advisor before settling on any tax reduction method.

Tax settlement companies talk with the IRS on your behalf to reduce your overall tax bill.  It is a paid service that can bring substantial gain if you are obliged to pay a large amount of tax.

Also Read : How To Buy Stocks In India

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