2021-04-19 00:00:00

Earned income is taxed at the federal, state, and local levels, with extra levies to support program

s such as Medicare & Social Security, to name a few. Taxes are difficult to escape, but there are a variety of techniques available to help you avoid them.

Historically, municipal bonds have had lower interest rates than corporate bonds. Purchasing a municipal bond entails lending money to a state or local government for a fixed amount of interest payments for a specified period of time. The entire amount of the initial investment is returned to the buyer until the bond meets its maturity date. Municipal bond interest is tax-free at the federal level, and it may also be tax-free at the state and local level, depending on the location. Municipal bonds are appealing to investors because they pay tax-free interest.

Employees who have a high-deductible health care plan will put their money into an HSA to save money on taxes. Money is put into an HSA before taxes, much like a 401(k). The annual donation for 2020 is $3,550 for individuals and $7,100 for families. In 2021, an individual's maximum deductible contribution is $3,600, and a family's maximum deductible contribution is $7,200. These funds will then expand without having to pay taxes on their revenues. Withdrawals from an HSA that are used to pay for eligible medical costs aren't taxable, which is an added tax gain.

Contributing pre tax dollars to eligible retirement and employee profit accounts will help you avoid paying taxes on some of your earnings while deferring taxes on others. The Earned Income Tax Credit is one of many IRS tax credits that will help you save money on your taxes. In 2020, a low-income taxpayer with three or more eligible children could receive up to $6,660 in credits, $5,920 with two, $3,584 with one, and $538 with zero. While it is important to pay all taxes owed to the IRS, no one is required to pay anything extra. 

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