It is a recognized fact that service tax payment is one of the major deductions taken from both the salaries of employees and the self-employed. Tax payments generally account for approximately 15% of most employees’ incomes and for self-employed individuals the percentage is higher. This is due to the fact that someone who manages his or her own business is both the employer and employee, therefore the burden of paying for a tax is not shared with the employer.

It is also well known that the super-rich in today’s economy pay a lower tax percentage on their incomes when compared to middle class individuals. This is due to the use of numerous professional tax preparers who provide legal advice on avoiding excess payments. While most of us might not have the funds to enjoy the luxury of numerous accountants or offshore banking services, there are still legal methods available to the average individual to help avoid paying high taxes.

Legal Ways to Reduce Taxes for Individuals

1. Adjusting Withheld Tax: Receiving tax refunds at the end of the year may look like a dream come through to most individuals, but the reality of this situation is that you are losing money because the tax refund you receive each year could have been put to better use in your private business or investments. The solution to stop this from happening is by simply filing up the necessary forms with your employer to adjust your withholdings to a higher amount, and then you can relax and observe the added income that comes in.

For instance, if you claim zero or one on your taxes to have more money withdrawn, raise the amount to claim 2 or even higher. You’ll bring in more money that you can use now, although if you raise your withholdings too high you’ll end up owing more taxes at the end of the year.

2. Taking Tax Credits: Most people qualify for tax exemptions without even realizing it and as a result they end up paying taxes which otherwise could have easily been avoided with a little knowledge. Tax credits reduce the percentage of tax an individual pays by the dollar and is one of the most powerful tools you can use to legally avoid paying high taxes. There is a defined list of tax credits which you can be eligible for and in some cases, you could be eligible for two or three tax credits. The list includes: child tax credit, earned income credit, retirement savings credit, home buyer credit etc.

3. Tax Deductions: The IRS also provides individuals with legal means to help them lower their taxes but a lack of knowledge about these opportunities make a lot of people lose out on these incentives. A tax deduction is an amount from a person’s income that tax organizations allow to be removed from the taxable income. These deductions can come in the form of student loan interest, prescribed medical aids i.e wheel chairs, loss of property which could be due to natural disasters etc. Individuals who partake in charitable donations are also prime candidates for benefiting from state tax deductions.

Receiving a tax deduction for monetary donations to charity, comes with its own guidelines which include: making a yearly donation of over $5000, filing the appropriate forms and donating to a registered charitable organization. The easiest way to know about available tax deduction avenues in your locality is by seeking the help of a tax preparer.

Legal Ways to Reduce Tax for the Self-Employed/ Small Business Owners

a. The S Corporation Technique: Taxes are applied to an individual’s income which is salaries or wages collected leaving the dividends aside. Therefore forming an S corporation to receive payment from your clients and issuing a reduced salary to yourself while collecting the rest as dividends drastically reduces your tax. This is by no means illegal and is a practical and safe technique to reduce the amount of money paid out to service your tax.

b. Deducting Business Expenses: This is also one of the freebies tax organizations provide for small business owners to help them reduce taxes. It involves keeping a record of all valid business expenses such as the purchase of equipment, legitimate business travels, office rent, utility bill for those who work from home etc. Every disbursement made in making your business operational should be deducted and the advice of a professional can also be sought to differentiate business expenses from normal ones. A trip to the Bahamas is obviously not a business trip and adding that to your expenses is counter-productive for only legitimate expenses count as business expenses.

c. Hiring freelance/Independent Contractors: Outsourcing some jobs to independent contractors removes the burden of withholding their income tax from their earnings because the IRS does not see these workers as employees but as contractors. Further advice on this method should also be sought from tax preparers so your business does not get saddled with back taxes and fines due to violations.

Andras Deak is an occasional guest blogger on many topics, now a trainee at a financial service company.

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