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What is Tax Reduction?

What is Tax Reduction?

The payment of tax is an obligation that every income-earning adult must adhere to, and failure to do it attracts penalties. However, there are times when taxes can feel like a burden.

If you are in such a situation, there are systems put in place to help you cast off the shackles of your tax debts by reducing the weight of your tax liability.

Tax reduction as the name implies refers to the process of reducing the amount of tax a person or company has to pay. There are legal ways for you to reduce your tax bill and retain the bulk of your income. This is why seeking the services of a qualified tax consultant is extremely important.

Generally, to reduce your tax payment, you have to reduce your income. One way to do this by quitting your job and not making any money. But since that is impossible, there are other much better ways.

You can reduce the amount of your income which the government views as taxable. This does not mean you have to make less money, it just means that you have to switch over to certain kinds of income that aren’t taxable (called tax-exempt income). Tax laws are more in favor of business owners and investors than they are for income earners, and the more tax-exempt income you have, the less tax you’ll have to pay.

Another way is to maximize your tax deductions. The more tax deductions you have, the lighter the weight of your actual tax liability.

 3 methods of Tax Reduction

  1. Putting money away into a 401(k)

Generally, you should pay taxes on every money you make. Once the money comes through the door, taxes are expected of you. However, with a 401(k), the IRS lets you take a chunk of your money to deposit first, then they’ll charge taxes on whatever is left. The end result is that your tax is reduced and you get to save and invest with tax-free earnings.

You must be aware that 401(K)s were set up to help you save for retirement, therefore, you can not access the money you saved there until you’re over 59 years of age. However, you can take loans from your 401(k) account for major projects like buying a house.

You can only put money away into 401(k) if you have an employer that offers one. If you do not have an employer that has one or you are self-employed, consider the next option.


  1. Simplified Employee Pension IRA Account:

This is an equivalent of the 401(k) for business owners, freelancers, and self-employed people. It lets you put away up to 25% of your net business income into a tax-free investment account.

If you are a business owner, a freelancer, or a self-employed individual, you definitely need to look into setting up a Simplified Employee Pension IRA account. That way, you can pay less in taxes than you’ve ever had to pay.


  1. Health Savings Account:

This is similar to the 401(k) and SEP IRA in that any contribution made to it immediately reduces your taxable income but Health Savings Accounts are a little different because they are supposed to help you pay for health-related issues with tax-free money.

The good thing about Health Savings Account is that you do not have to wait for retirement before you can use it. You can use it for all health-related expenses right now.

Health savings account are typically only allowed for people who have health insurance plans that have really low monthly premiums but higher out of pocket expenses.

If you’re pretty healthy and you want a tax-savvy way to cover your medical expenses if and when you need it, a health savings account may be the best option for you.


  1. Munis (Municipals Bonds)

This is one way to make tax free income. Munis are bonds issued by local government to fund things like infrastructure, water projects, and any other service that the city county or state requires to function properly. The best way to invest in municipal bonds is through municipal bond funds. These are bonds that hold a large number of bonds from municipalities.

This is good because it helps you diversify and reduce your credit risks. Short term municipal bond funds can be a relatively safe place to keep your cash while earning some tax-free interests.

Do you need help with planning and implementing a tax reduction strategy? Our team of experts is at your service to help bring you workable solutions that resolve your tax issues and protect your assets.

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Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.