How to lower your taxable income is perhaps one of the most searched topics among business owners and individuals. There are a plethora of ways you can lower your tax bracket and taxable income, and this article aims to share tips and methods for this tax season. Let’s begin.
Land Conservation Easement
This method of lowering your taxable income this tax season requires you to own a piece of land and place an easement on that land, barring further development on it. When you do this, you get a charitable tax deduction in the difference between the property’s fair market value—if you had developed the property to its best and highest use—and the value of the land with the easement on it.
For this tax benefit to work, the land has to be worthy of preservation, and you will be required to go through a few measures to align with any compliance guidelines and get a valuation.
Investing in Working Interests in Oil and Gas
While it might seem a strange tactic to lower your taxable income by investing in other industries, this is the right move for those looking to diversify their investments.
The reason for this is the special carve-out in the tax code that allows you to make losses from investments in currently operating gas and oil assets. Your investments are made non-passive regardless of whether you are an active or passive investor.
Typically in the initial years of oil and gas investments, you see losses. The reason for this is due to the exploratory phases. There are disadvantages; however, you could be exposed to a limited legal liability resulting in an ongoing risk or cost.
Utilize the Short Term Rentals Federal Income Tax Loophole
The short-term rental federal income tax loophole is common knowledge among seasoned real estate investors as it has helped individuals lower their taxable income by thousands of dollars.
The short-term rental loophole is simply a section of the US tax code that states that if an average customer stays at a short-term rental for a maximum of 7 days, then your short-term rental doesn’t count as a rental activity for tax purposes.
It is treated as a regular business. This ultimately means that you must materially participate in the business to generate non-passive losses, which can offset your taxable W-2 income.
Earn the Real Estate Professional Status
The following strategies highlighted under this heading are real estate-specific and have ensured a numerous high earners have entered the real estate industry seamlessly. Regardless if you have ever been interested in real estate investing, the associated tax savings are sure to make this an attractive prospect.
To qualify as a real estate professional, you must spend 750 hours and at least half of your working time in a business or trade associated with the real estate industry. This is important for tax purposes as real estate professionals can lower their taxable income via writing off depreciation and cost segregation studies. In certain instances, a real estate professional can lower their tax burden to as low as 10% from 35%.
Discover how you can invest in multifamily units without stress.
Pay Into a Health Savings Account (HSA)
Paying into a health savings account can help you lower your taxable income in a few ways:
- HAS funds can be used for certain medical expenses that aren’t taxed when withdrawn
- You get a tax deduction for the contribution to the health savings account
- Any investment earnings or interest aren’t taxed
You should note that you must spend the money you get from a health savings account on qualified medical expenses to be tax-free and take advantage of the tax benefit.
Charitable Contributions
Charitable contributions can be a great way to lower your taxable income. This is possible by itemizing the deductions. In short, you can reduce your taxable income by giving more.
Save for Retirement
Maximizing your retirement savings is perhaps one of the most straightforward ways to lower your taxable income. While there are various retirement savings accounts to select from, the following are two of the most widely used ones that can help you lower your taxable income in the tax year you contribute.
Individual Retirement Account (IRA)
As an individual, you can also save for retirement by contributing to an individual retirement account. An IRA allows you to make a yearly contribution to it by deducting a particular amount from your tax return, thereby lowering the value of taxes you owe in the year you make said contribution.
You should note that IRA contributions are generally made after-tax, meaning that your income has already been taxed.
Employer-Sponsored Plan
If your organization has an employer-sponsored plan, like a 403(b) or 401(k), you can make pretax contributions up to a certain amount. This is especially used if you are older than 50, as you can make catch-up contributions far exceeding the pretax contributions limit. All these contributions can help you lower your taxable income for that tax year even before income taxes are applied.
How to Lower Your Taxable Income: Conclusion
While all of the tips listed in this article on how to lower your taxable income are above board, it is still important to speak with a tax professional as they can help you create a tactic to lower your taxable W-2 income.
There are many other spots found in the US tax code that you and everyone else can leverage. To take advantage of this, you need a real estate tax expert to help you understand it all by figuring out how real estate-specific and general tax-bill reduction strategies can work in your favor.
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