Legal Ways To Lower My Tax Burden in My State

Many people and businesses may struggle to pay taxes. The last thing you want to do is to pay more in taxes than you actually owe under state and federal law. With proper tax planning and advice, you can lower your tax burden, saving more than the cost of hiring a tax or legal professional.

Tax laws vary by state and jurisdiction. For legal advice about lowering your tax liability and maximizing your tax savings, talk to a local tax law attorney.

Understanding State and Federal Income Tax

The federal government and many states, cities, and municipalities tax the income of tax filers. According to the Internal Revenue Service (IRS), gross income includes “all income from whatever source derived.” This includes your salary, business income, interest, and even discharge from debt.

“The tax code is constantly changing, and unless you’re going to research it yourself and stay on top of the news, you’re not going to be aware of the changes that occur,” says Andrew B. Gordon, a tax attorney with Gordon Law Group in Skokie, Illinois.

Here is an overview of some common (legal) things you may be able to do to lower your tax bill:

Tax Write-Offs or Tax Deductions

In most cases, the best way to lower a tax bill is to reduce your total taxable income. A tax write-off is a legitimate expense that can be deducted from a taxpayer’s total taxable income.

For an individual, some common tax write-offs include medical expenses, health insurance, and charitable contributions. For businesses, common examples include work-related travel expenses, business taxes, and employee wages. There are several other options for itemized deductions.

Tax Exemptions

Tax exemptions are another way to reduce the total taxable income. Certain income may be ‘exempt’ from any taxation. The most common example is the child tax credit. Parents can take a significant deduction for each qualifying (dependent) child.

Tax Deferrals

In some cases, taxpayers can delay paying until a future date. Deferring taxes is an effective financial strategy for lowering costs. Doing so can offer a substantial financial advantage, as income may be taxed at a lower rate in the future or the taxpayer can defer taxes indefinitely.

Tax Credits

A tax credit can be subtracted directly from the total taxes that an individual owes the federal government or the state. As noted by the IRS, there are a number of different tax credits available.

Retirement, Education, and Health Savings Accounts

Retirement accounts (like traditional IRAs and 401(k)s), education savings (529 plans), and health savings accounts (HSAs) can all reduce your pre-tax income.

The savings continue to grow tax-deferred. For IRAs and 401(k)s, you only pay taxes when you make withdrawals. Education savings plans are tax-exempt for qualifying withdrawals. Under certain conditions, HSA distributions are also tax-exempt.

There are generally maximum contribution amounts to these types of plans, which can vary by year. However, a Roth IRA retirement plan uses after-tax contributions. However, Roth IRA distributions are tax-free, allowing for tax-efficient treatment in variable tax years.

State and Federal Tax Laws, Credits, and Deductions

Individuals and businesses should have a general understanding of all relevant state and federal tax laws to effectively minimize their financial liability. However, that may sometimes require professional guidance to take advantage of every available tax deduction or tax credit.

The same is true for avoiding the unexpected. The 2017 Tax Cuts and Jobs Act came into effect in 2018, and “made a lot of significant changes, both at the individual and business level,” Gordon says.

“For businesses, one of the changes that is most surprising is that entertainment is no longer deductible. So if you want to take a prospective or current client to a Bulls game, that used to be a 50 percent deduction, but now it’s 25 percent. Simple things like that are actually pretty significant.”

Tax Rates and Tax Brackets

Tax brackets are the tax rates for income ranges. When something “puts you in a higher tax bracket,” the higher rate only applies to the additional income in that bracket. The remaining income is taxed at the applicable income bracket rate.

Not all income is taxed at the same tax rate. For example, the tax rate for short-term capital gains is the same as the individual’s income tax rate. However, long-term capital gains are generally taxed at a lower rate.

After calculating your gross income, reduce any deductions for adjustments, like student loan interest, retirement contributions, deductible self-employment taxes, and other qualifying expenses. The result is your adjusted gross income (AGI). Adjustments to income (above-the-line deductions) apply before deciding whether to itemize or take the standard deduction.

A Lawyer or CPA Can Help with Tax Reduction

Taxes are complicated. Whether a deduction, credit, tax write-off, or deferral is applicable to your situation depends on many factors. It is crucial that taxpayers and businesses get access to the fully personalized, professional support that they need. A good tax advisor may be able to save you thousands of dollars.

“Attorneys typically cost more than accountants, who cost more than your corner tax shop,” Gordon says.

“That being said, there are some things we do to add more value. For example, a place like H&R Block won’t give you advice; they’re there to help you do your tax return… Planning is where we can save clients significant amounts of money — often more than the marginal increase in hiring an attorney. It’s not always the case, but there are plenty of examples where we can legally help save a lot in taxes.”

Lawyers come with another advantage: the attorney-client privilege. “That is more important to some than others, but working with a CPA or H&R Block gives you very little privilege. So, depending on your circumstances, you may want that.”

Find Legal Tax Help

If you have questions or concerns about paying taxes or about any specific tax planning strategy, such as property tax exemptions, an experienced tax attorney can offer guidance.