28 Nov Proven Legal Ways to Reduce Your Tax Burden
Although paying taxes is unavoidable, there are certain ways you can reduce your tax burden. If you are looking to minimise your taxes, thorough research is one of the ways you can understand the different ways you can reduce your tax returns. We all have different sources of income, which means how you can reduce your tax returns can vary from person to person. For instance, the amount of tax you pay is not based on your gross income but your taxable income. Therefore, minimising your taxable income can help you reduce the amount of tax you pay yearly. First and foremost, tax planning is the key to reducing your taxes.
What is Tax Planning?
Tax planning involves conceiving and implementing various strategies to minimise the amount of taxes that need to be paid. When tax planning, all the financial elements are considered, ensuring financial efficiency.
Here are some of the ways you can Minimise Your Taxes:
i. Donate Money, Stocks, and Goods to Charity
When you donate goods or money to a charity you are not only reducing your taxes but also helping people in need. However, there are certain rules that you should follow to be eligible for tax deductions. For instance, the non-profit organisation should qualify as a charity organisation as per the set rules. Also, for donations (both in cash or goods) exceeding £250, you need a payroll deduction record, written acknowledgement or a bank record to provide more details. To avoid any problems in the future you should familiarise yourself with all the rules before donating goods, money, or even stocks to charity.
ii. Contribute to a Retirement Account
Contributing to a retirement account helps you save money for retirement while cutting your tax bill. Normally, as you contribute to your retirement account, the money grows in your account untaxed. However, when the time comes to withdraw it, you will be taxed at the ordinary rate at that time. This method is ideal for people who will have lower incomes when they retire because they will be in lower tax brackets, reducing their taxes in the long run.
iii. Claim as many Deductions as you can
You need to claim numerous deductions to reduce your taxable income and consequently the amount of money you pay in taxes. When choosing the deductions to include, you can either choose the standard deduction or itemise your deductions. If you choose to itemise your deductions, their value should exceed the value of the standard deduction. Some of the deductions you can choose from include medical expenses, owning a home or a business, retirement accounts, being a student or a self-employed worker, for example.
iv. Claim Numerous Tax Credits
If you have numerous tax credits, you reduce your taxes significantly because tax credits aren’t taxed. For example, if you have a £5,000 tax credit, you save £5,000 in taxes! It is important to note that tax credits exist on all kinds of things including energy-efficient home improvements, childcare, education expenses, child adoption, paying foreign taxes, etc. Therefore, it is up to you to determine the tax credits that you are willing to include every month or year to reduce your tax returns.
Finally, whether you choose either of these methods, consider having a designated place in your home to safely store all your documents including charitable donations, financial transactions, childcare, proof of medical expenses, etc. This is just in case you need these documents in the future for a tax review.
If you are interested in possibly reducing the amount of taxes you pay, Aurea Financial Planning offers tax planning amongst many other financial services. If you are interested in any of our services or have any queries, visit our contact page or call us today on 01733 345525.