- Taxes are a burden for many people.
- I legally keep mine lower by maxing out my retirement plan and closely keeping track of business expenses.
I don't like paying the IRS any more than I need to.
I learned long ago that taxes are a part of life -- namely, when I got my first measly paycheck from a part-time job during high school and saw a chunk of my wages missing. But that doesn't make them a part I particularly enjoy.
As someone who's self-employed, each year, I make estimated quarterly payments to the IRS in the hopes of fulfilling my tax obligation. And most years, I still end up owing money when I file my tax return.
Still, there are three key steps I take that help me pay less tax on a whole. And don't worry -- they're perfectly legal. Here are a few you may want to try.
1. I max out my retirement plan
Being self-employed means I'm able to contribute money to a solo 401(k). That's a special 401(k) that comes with higher contribution limits than a traditional 401(k).
But no matter what type of retirement plan you have access to, it pays to max out your contributions if possible. If you put extra money into a traditional IRA or 401(k), that's pre-tax income the IRS won't be able to tax you on. Plus, it's money you'll get to save and invest for your future.
2. I keep solid records of business expenses
As a freelance writer, I don't incur a ton of expenses in the course of doing my work. But I do have my share of legitimate expenses I can deduct.
Take my internet service, for example. I need that to do my job, so I have no problem writing it off on my taxes.
Plus, from time to time, I need to invest in equipment to get my job done, whether it's a new mouse, keyboard, or laptop. Those, too, are valid expenses given my line of work.
One thing I always make certain to do is keep good records of my business expenses. Not only do I keep receipts, but I scan them to make sure they won't degrade over time. That way, I'm able to maximize my tax break.
3. I'm careful about taking gains in my brokerage account
While I'm currently housing my retirement savings in a solo 401(k), I also have money invested in a regular brokerage account. That money is, if all goes according to plan, money I hope to use for retirement purposes. But I like the fact that my brokerage account gives me flexibility. If I need to withdraw funds from that account in the near term, I have the right to do that.
At times, I may decide to sell stocks in my brokerage account at a profit. But I'll generally only do so if I've held them for at least a year and a day. That way, the capital gains taxes I'm charged will be less than what I'd pay for selling investments at a profit after only holding them for a year or less.
Paying taxes is something all of us have to do. But there's nothing wrong with being strategic so you wind up paying less.
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