As the saying goes, death and taxes are inevitable. If you donít pay your taxes on time, the IRS will come knocking on your door.
However, you can legally avoid paying taxes or at least reduce your taxes. Here are some of those ways.
Claim Your Tax Credits
The IRS provides several tax credits and deductions options to reduce taxes. You need to know the deductions and claims you qualify for, to avoid paying more.
For instance, you can get deductions when buying energy-efficient products for your house or even on your health insurance premium payments.
The IRS offers over 17 tax credits for individuals in 5 different categories which are:
- Family and Dependent Credits
- Income and Savings Credits
- Homeowner Credits
- Health Care Credits
- Education Credits
You can check the IRS credits and deductions page for the exact breakdown you may be eligible for.
Maximize Your Itemized Deductions
Most people only opt for standard deductions when filing taxes to avoid hassle of providing proof for all the purchases they have made. But if youíve made substantial payments for property taxes, mortgage interest, medical expenses, local and state taxes or made high charitable contributions, you should give it a shot.
These are deducted from your adjusted gross income and reduce your overall taxable income. You can use the IRSís interactive tax assistant to calculate which deductions (standard deductions or itemized deductions) would reduce more taxes.
Enroll in a College
Another way to take advantage of tax deduction is by enrolling in a college. The government currently offers two education tax credits.
The American Opportunity Tax Credit which offers up to $2,500 off of tuition fees and study material.
The Lifetime Learning Credit which offers up to $2,000 tax exclusion per year.
Also, all financial study grants and scholarships are tax-free.
Start a New Business
A new business might offer additional tax benefits. Self-employed individuals are offered deductions on health premium and office-related expenses like transport, rents, vehicles, etc.
New businesses might also be eligible for deductions on home-office related expenses like the internet and other utilities being used for business. You can also deduct your start-up costs or any additional expenses to run the business. And if your business is not doing well, you can also claim high lucrative deductions from business losses.
And if you start your new business abroad, you would be eligible for more deductions. You will be eligible for lower tax rates for income earned in foreign currencies. Just by living abroad, you may qualify to exclude from income up to $91,400 of your foreign earnings.
Renounce Your Citizenship
You are charged taxes based on your citizenship and no one is exempted from paying taxes irrespective of where he works or lives. If you want to avoid paying income tax while living abroad, you can renounce your citizenship.
But many individuals might avoid using this method, since youíre still expected to pay a large amount of exit tax to the IRS. Renouncing oneís citizenship is a complicated and time-consuming process, since you need to contact the US embassy and get the paperwork done in presence of a diplomat. This exit tax is calculated based on your net worth and the assets you own in the US.
However, you might be eligible for some deductions, credits and exclusions on these. You can get in touch with an International Tax Lawyer and CPA to calculate what exactly you may owe if youíre renouncing your citizenship.