Although it is tough to avoid paying taxes, there are a lot of different ways that may assist you in doing it. There is no need for anybody to pay more than what is legally required to pay in taxes, even though it is crucial to do so. Tax breaks of hundreds, or even thousands of dollars, might be found by spending a few hours on the Internal Revenue Service website (IRS.gov) and researching credible financial information websites. Here are six strategies that might help you avoid paying taxes on your income.

1. Invest in Municipal Bonds

When an individual purchases a municipal bond, they effectively give money to a state or local governmental organisation in exchange for a certain number of interest payments spread over a specified amount of time. When the day of maturity for the bond has arrived, the purchaser will get back the whole amount of money that was first invested. Historically, municipal bonds' default rate has been far lower than that of their corporate bond equivalents. According to research on municipal bonds from 1970 to 2019, the default rate for investment-grade municipal bonds was 0.1%. In contrast, the default rate for global corporate issuers was 2.25%.

2. Shoot for Long-Term Capital Gains

Increasing one's wealth may be accomplished in significant part via the use of investments. The tax treatment of long-term capital gains is more advantageous than that of short-term profits, making it one more reason why investing in stocks, mutual funds, bonds, and real estate may be beneficial.

An investor who has held a capital asset for more than one year is eligible for a preferential tax rate on the capital gain of zero per cent, fifteen per cent, or twenty per cent, depending on the investor's income level. If the asset is sold after having been owned for less than a year, the gain on the asset is subject to the same taxation as ordinary income. When building wealth, a solid understanding of the difference between long-term and short-term capital gains rates is essential.

3. Establish a New Enterprise

A siding company has various financial benefits, in addition to the obvious one of generating more revenue. When they are utilised in the normal course of business, many costs are eligible to be deducted from income, which lowers the overall amount of tax that must be paid. Health insurance premiums are tax deductions that self-employed persons may claim; however, certain standards must be satisfied to claim this deduction. A taxpayer must be running a company intending to make a profit to qualify for these deductions. Publication 535 outlines the many considerations that are taken into account by the IRS. Taxpayers who have had at least three profitable years in the preceding five are deemed to be operating a business to make a profit.

4. Max out Retirement Accounts and Employee Benefits

Contributing up to $6,000 ($7,000 for those 50 and over) in 2022 and 2021 to a standard individual retirement account (IRA) will qualify a person for a tax deduction, even if they do not have access to an employer-sponsored retirement plan. Depending on the taxpayer's income, they may be eligible to deduct some or all of their contributions to their conventional IRA from their taxable income if they participate in a workplace retirement plan or if their spouse participates in such a plan. The Internal Revenue Service (IRS) has very specific criteria governing whether or not you may take a deduction or how much you can take.

Fringe Benefits

In addition to contributing to retirement plans, many businesses also provide employees with access to a range of fringe benefit schemes, which enable workers to deduct either the payments they make or the benefits they get from their taxable income. On workers' W-2 forms, the benefits they receive under these programmes will often be shown as sums that are not taxable.

5. Use a Health Savings Account (HSA)

A health savings account, often known as an HSA, allows workers with high-deductible health insurance plans to lower their taxable income. Like 401(k) contributions, HSA donations made via payroll deduction are not included as part of an employee's taxable income. On the other hand, direct contributions made by an individual are fully deductible against that person's income.

6. File A Claim For A Tax Credit

One of the various tax credits offered by the IRS that might lower your overall tax burden is the Earned Income Tax Credit. A taxpayer with a low income might receive credits totalling up to $6,728 for the tax year 2021 if they had three or more qualified children, $5,980 if they had two, $3,618 if they had one, and $543 if they had none.