How To Avoid Paying Taxes in 2024
Reading Time: 5 minutesWhen business owners search for articles on how to avoid paying taxes, the common thought is to discover a hack to evade taxes. However, that is a misinterpretation.
“How to avoid paying taxes” is Tax Avoidance—finding a legal way of reducing your taxes.
Its misinterpreted meaning—not paying taxes at all—is Tax Evasion.
Tax evasion conceals financial information from tax authorities, which can result in significant fines, penalties, and damage to a business’s reputation and growth.
Instead of avoiding paying taxes, you should focus on finding legal and ethical ways to reduce them.
Here are…
Simple ways to avoid paying taxes legally:
Click on the links to navigate to specific sections.
- 401k/Contribution to IRA
- Open a Health Savings Account
- Itemized Deductions
- Claim Tax Credits
- Charitable donations
- Flexible Spending Accounts (FSA)
- Invest in Municipal Bonds
- School Enrollment
- Self-employed/Independent contractor deductions
- Seek professional advice
401k/Contribution To IRA
Contributing to an Individual Retirement Account (IRA) can reduce your annual taxable income.
While your contributions can’t exceed the total income earned or maximum yearly contribution in a taxable year, it is 100% deductible.
The retirement plans must satisfy IRS requirements and include, but are not limited to:
- Roth IRA
- Simple IRA
- Solo 401(k)
- Keogh plan
You are probably asking…
How much can I contribute to my 401k?
Each year, usually in October or November, the Internal Revenue Service (IRS) reviews the contribution limits for 401(k) plans, individual retirement accounts (IRAs), and other retirement savings vehicles.
- Employees can contribute up to $23,000 to their 401(k) plan in 2024. Up from $22,500 in 2023.
- Anyone age 50 or over is eligible for an additional catch-up contribution of $7,500 for 2024.
- The general limit on total employer and employee contributions for 2024 is $69,000 ($76,500 with catch-up). This number is up from $66,000 ($73,500 with catch-up) in 2023.
Open A Health Savings Account
Freelancers or self-employed individuals covered by a High-Deductible Health Plan (HDHP) are eligible for a health savings account (HSA).
You can contribute to a health savings account to lower taxable income if you have an eligible high-deductible medical plan.
Contributions to these accounts are tax deductible and can be withdrawn tax-free for qualified medical expenses.
Furthermore, balances at the end of the year can roll over indefinitely.
Itemized Deductions
While most people commonly use the standard deduction because of its simplicity, itemized deductions allow you to make a detailed list of all payments or contributions that are tax deductible.
Payments for mortgage interest, property taxes, medical expenses, and local and state taxes fall under tax deductibles.
Itemizing these payments qualifies you for tax deductions subtracted from your adjusted gross income, reducing your taxable income.
Check out the Tax deduction cheatsheet for small businesses.
Claim Tax Credits
Tax credits reduce the tax you owe to the Internal Revenue Service (IRS) or other tax authorities, with the possibility of a refund from the government.
For tax returns filed in 2024, eligible taxpayers can receive a tax credit between $600 and $7,430, depending on their filing status, income level, and number of children.
The Earned Income Tax Credit (EITC) is calculated using a formula that considers income and family size.
The income limits for the credit range from $17,640 for single taxpayers with no children to $63,398 for married couples filing jointly with three or more children.
The IRS website breaks down all the credits you may be eligible for as a business or an individual.
Charitable Donations
You can claim charitable contributions as itemized deductions on Schedule A of IRS Form 1040 under “Gifts to Charity.”
Charitable contributions made with payroll deductions, checks, cash, and donations of goods and clothing are all deductible.
For deduction eligibility, it is essential to have tax receipts for donations made online to a charity or even volunteering expenses like gas mileage.
Flexible Spending Account (FSA)
A Flexible Spending Account is a pre-taxed payroll deduction by an employer to fund an account for employee expenses such as insurance copays or over-the-counter medication.
There are two types of FSAs:
- Medical FSA: A medical FSA allows employees to set aside pre-tax dollars to pay for qualified medical expenses such as copays, prescription drugs, and over-the-counter medications.
- Dependent care FSA: A dependent care FSA allows employees to set aside pre-tax dollars to pay for qualified dependent care expenses such as child care or adult daycare.
In both cases, there are limits to how much you can deposit, and money may be forfeited if not used by the end of the year.
Invest in Municipal Bonds
Municipal bonds are debt securities issued by state and local governments or government agencies to finance public projects such as infrastructure, schools, and hospitals.
Municipal bonds are considered relatively safe investments, as the issuing government entity with low default risk backs them.
Buying a municipal bond essentially exempts you from paying taxes, as the total amount of your original investment plus interest is repaid once the bond reaches its maturity date.
School Enrollment
Another way to avoid paying taxes is to get credit for education enrollment.
The US government offers credits and deductions to return to school online or in your community.
You can take advantage of the education tax credits through the American Opportunity Tax Credit, which offers up to $2,500 credit paid during the taxable year per student. It’s calculated as 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of expenses.
You could also consider the Lifetime Learning Credit, which offers up to $2,000 off tuition, fees, and course materials in 2024. This is only credited once per year and it’s calculated as 20% of the first $10,000 of qualified expenses.
Check out: The 2023 Income Tax Brackets for Individuals and Married Couples.
Self-Employed/Independent Contractor Deductions
You can claim tax deductions as a self-employed, independent contractor, or freelancer.
The self-employment tax rate is 15.3% – 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (1.45% for both employees and employers as it was in 2023).
In 2024, the maximum amount of income subject to Social Security tax will increase to $168,600, up from $160,200 in 2023. As a result, the maximum amount of Social Security tax that an employee can expect to have withheld from their paycheck in 2024 is $10,453.20, which is calculated as 6.2% of the new taxable income limit. This represents an increase from $9,932.40 in 2023.
You can compute self-employment tax on Schedule SE (Form 1040).
When figuring out your adjusted gross income on Form 1040 or Form 1040-SR, you can deduct one-half of the self-employment tax.
Seek Professional Advice
Working with a tax expert or financial advisor can help your business identify tax-saving strategies that comply with all relevant laws and regulations.
A professional can help a business understand its options and make informed decisions about how to avoid paying taxes.
Final Thoughts!
Overall, there are many strategies that your business can use to minimize the cost of taxes and improve profitability.
The goal should not be to evade taxes but to reduce the amount you pay to the government in an accounting year.
It is critical to comply with all relevant tax laws and regulations and seek professional advice to minimize the tax burden and improve financial performance.
