[ad_1] The post How to Pay Less Taxes appeared first on Millennial Money. Ask any wealthy person what it takes to build a fortune, and you’re bound to hear a similar refrain: It’s not about how much you make. It’s about how much you keep. As you get older and start earning more, it becomes increasingly vital to protect your wealth from the tax collector. This post explores what you can do to lower your tax bill and keep more of your hard-earned income. How to reduce your taxable income Earn less money Use a financial planning tool Maximize your retirement accounts Check for local tax credits Consider working as an independent contractor Donate to charity Sell bad stocks Move to a tax-friendly state Sell your car Purchase real estate Invest in municipal bonds 1. Earn less money The more money you make, the more you’ll have to pay in taxes. That’s just the way it goes. Top earners know this all too well. That said, if you have any control over your income, you may be able to limit what you bring in strategically to stay within lower tax brackets. For example, if your adjusted gross income (AGI) is somewhere between $40,126 and $85,525, you’ll pay a tax rate of 22%. If you exceed that threshold, you’ll move up to the 24% bracket. So, as you get to the end of the tax year, you may want to consider scaling back if you’re in that ballpark if it makes sense. 2. Use a financial planning tool Use a tool like Personal Capital to centralize tax planning and maximize tax efficiency. You’ll become much more organized, and the software will be able to help you identify possible tax advantages you may not know about. There are a variety of personal financial planning tools on the market, so check out the various options. Of course, if you’d rather talk to a human, you might want to enlist the services of a CPA who can help you figure out how to navigate tax law effectively and make decisions that work for your specific situation. Learn more: Is Personal Capital Safe to Use? Basic Financial Planning for Beginners 21 Best Personal Finance Software (Free & Paid) for 2021 How to Make a Financial Plan 3. Maximize your retirement accounts One of the best things you can do to reduce the amount you pay in taxes is to maximize your retirement savings. When you invest in a brokerage account, you have to pay taxes on all dividends and capital gain that you make during the year. This can add up to a substantial amount if you’re actively investing and moving stocks around. Investing in a brokerage account is perfectly fine; there just aren’t any tax advantages. If you want to reduce your tax obligations, you need to leverage specific tax-friendly retirement accounts. Here are a few examples to consider. 401(k) Check with your employer to see if they offer a 401(k) retirement plan. Not all employers do, but it’s one of the best opportunities to stash money away for retirement. By opening a 401(k) plan, you can put up to $19,500 away for either tax-deferred or tax-free growth, depending on whether you open a traditional 401(k) or a Roth plan. As an added bonus, employers often make 410(k) matches. So, there’s a chance your employer will match at least a portion of what you contribute to your 401k. This can help you stash away even more money for retirement while reducing the amount you have to report as taxable income. A 401(k) account typically allows full access to a broad range of investment opportunities like stocks, bonds, mutual funds, and index funds. Individual retirement account (IRA) Not every company offers a 401(k). But that doesn’t mean you’re completely out of luck. If you can’t contribute to a 401(k), you should look into opening an individual retirement account (IRA). With a traditional IRA, you can put up to $6,000 away for tax-deferred growth each year. Alternatively, you could put $6,000 into a Roth IRA. While this won’t give you immediate tax advantages, it will enable you to enjoy tax-free growth on those funds. Unlike a 401(k) account, IRAs are open to anyone. You can open an IRA with a broker like Schwab or Fidelity in just a few minutes. Just like a 401(k), an IRA lets you diversify your holdings among many different types of investments. Learn more: Roth vs. Traditional IRAs How Much Should I Have in My 401K Stocks vs. Bonds Index Funds for Beginners Roth 401k Might Make You Richer Solo 401(k) and SEP IRA If you work for yourself, you’re going to have to get creative about how you put money aside for tax savings. You won’t be eligible for a 401(k), and an IRA will limit you. Instead, look into a solo 401(k), which lets you contribute up to a whopping $58,000 for the 2021 tax year. You might also want to consider a simplified employee pension (SEP) IRA, which can enable you to invest up to $58,000 for 2021. Of course, in order to maximize these contribution limits, you need to be pulling in a lot of income. Either way, each account has different advantages. If the name of the game is paying as little tax as you can, both accounts can be a lucrative tax strategy. HSA If you have a high-deductible healthcare plan that exceeds $1,350 for an individual or $2,700 for a family, you can put up to $3,600 aside into a health savings account (HSA) for the 2021 tax year (and up to $7,200 if you’re married). Simply put, your HSA funds can be used to pay for expenses related to health insurance like prescriptions, medical supplies, and doctor’s appointments. It’s worth noting that, in most instances, you can’t use your HSA to pay for insurance premiums. When you put money into an HSA, you can offset your tax liability. And best of all,
