Ways To Lower Your Taxable Income & Reducing Your Tax Liability
Do you have income that you are paying taxes on, that maybe a protected deduction by the U.S. tax code? Do you want to keep Uncle Sam away from your hard earned money?
I am about to answer these questions for you. There are legal ways that you can protect your income from being eaten away by the IRS. There are tax laws that can protect your earnings from the IRS which means more money in your pocket. With some planning, you can begin to reduce your tax liability.
- Tax-free interest
- Earned interest from bonds that are issued by the state, territory, municipality or any political subdivision are free from income tax. Some bonds may not only be tax-free at the federal level, they may also escape state and local taxes. To discover which bond interest that you earn is tax-free, consult with your Trippon Tax CPA.
- Car-pool receipts
- Do you take the HOV/Car pool lane to work? You can create a carpool for passengers to and from work, and any income earned is tax-free.
Mileage for going back and forth to work is typically not deductible. However, if you establish a carpool, and receive “fees” to cover fuel and car maintenance, then you have an excludable income.
- Tax-free compensation
- When you are due for a raise, ask your company to get creative in your compensation. There are numerous ways to receive non-taxable compensation. Here is a look at some of the best alternatives to taxable earned income.
- Use your health coverage.
- Health and hospitalization insurance premiums paid by your current or former employer are tax-free — a huge benefit. Let us say your health insurance premiums come to $300 a month or $3,600 a year (for an HMO policy for a family of four with a $1,500 deductible). If you are in the 25% tax bracket and have to pick up the bill, the real cost to you would be $4,788. That is $3,600 for the premiums and $1,188 for additional income taxes because you will be paying for the coverage in after-tax dollars. Having your company pick up the cost helps both of you. It does not have to pay the salary necessary to get you even. It gets to write off the full cost of the coverage. Plus, neither of you has to pay the 7.65% payroll taxes on the premiums. And you, just increased your non-taxable income.
- Life Insurance
- Group term life insurance coverage of $50,000 or less paid for by your company is not taxed to you. You pick the beneficiary; your company pays the premiums. Your company deducts the expense; you walk away with additional tax-free income.
- Putting yourself through school
- Paying for your education can be a tax deduction up to $5,250 per year. Your company can compensate you by paying for your education as an alternative to income. You get the benefit of the education assistance, and it is tax-free income.
- Get you there… and parked.
- Your employer can compensate you up to $100 per month in public transportation costs. (Which they in turn write off – another win-win situation) Parking fees can be reimbursed up to $180 per month to you tax-free also. You can negotiate this with your employer. This could be of great benefit to you, especially if you are paying for these same expenses out of pocket.
- Cafeteria/FSA Benefits
- FSA, or Flexible Spending Accounts are another source of tax-free income. Your company makes deductible contributions under a written plan, which allows you to select between taxable and non-taxable benefits. The non-taxable benefits available include: life insurance, disability benefit coverage, dependent care, and health benefits. Check with your human resources department to see which non-taxable benefits are available to you.
Whenever you can turn your taxable income into non-taxable income, you have increased your bottom line. In most cases, both you and your employer benefit.
It is nice to reduce your tax liability, but be careful. Don’t get into ANY area that might be questionable by the IRS. It is better to be safe than sorry and face an IRS audit. Consult with your Trippon CPA tax preparation specialist to discuss the available options that you have to reduce your taxable income. Give us a call at 713-661-1040 to schedule your FREE tax assessment today.