Everyone that has an income has to pay taxes. However, the higher the income, the higher the taxes. If your company acquires a considerable income, you have to pay a huge amount of taxes, which is definitely unpleasant. Fortunately, there is a solution. You can resort to a series of investments to reduce taxable income, and everything is perfectly legal.

Unequal stacks of coins casting their shadow

Types of income generated by investments

You can acquire income from a series of activities, and they are split in different categories. If you make investments, then you produce three types of income. This income is taxable, but you can apply different strategies to reduce the tax you have to pay.

An investment portfolio can generate interest income. This comes mostly from saving funds and accounts, and whatever you get to save each month classifies as income. Also, you can be more active and collaborate with companies. By buying shares from them, you receive a dividend, from which you can receive an income.

In the end, your gains and losses are also included. This happens when you sell your shares, as you can either win or lose some capital. If you sell the share at a price higher than its value, you get a capital gain. If you sell the share at a smaller price, you get a capital loss.

To avoid having to pay huge taxes, you can choose from a series of investments to reduce taxable income.

Investments to reduce taxable income

1.      Increase your savings for retirement

Those savings made especially for retirement benefit from some advantages when it comes to tax paying. Therefore, a sure method to reduce taxable income would be to increase these savings. However, you have to qualify to put up such a tax-reduced saving account.

If you qualify to all the regulations, you can save about $5,500. It also depends on the retirement plan you have at work. For a 401(k) plan, you are allowed to direct up to $18,000 of your compensations straight into your savings. People over 50 can add some more money into the same account, thus reducing their taxes.

This strategy has benefits even for those that are self-employed. A sufficiently big income allows you to make the same contributions to your retirement savings.

2.      Manage your accounts carefully

You might have investments of more types, some of them that qualify for a tax reductions and others that do not. In this case, it’s extremely important to separate the income in different accounts. This way, as soon as you receive more of the tax-reduceable income, you can put it all together.

This especially applies for higher dividends. The more dividends you add in the account, the safest it is to secure them as low-tax income. However, you have to make up your mind on what you want to do with each earning. In some cases, bundling up all the dividends might be at your disadvantage.

3.      Change your traditional charity donations to stock

Instead of donating money for charity, choose stock instead. The advantages for the charity as the same as for a standard donation, and you also have a lot to win. By doing this, you can classify the entire value of your stock as a contribution to charity, and this comes with its own special tax regulations.

Also, if you are not the direct beneficiary of the stock value, you’ll get more benefits. Even if the stock in question has greatly increased in value since the moment of purchase, you won’t pay any taxes on the capital gain.

Gold bars next to a notebook and a pen

4.      Increase your health savings

This is somehow similar to the retirement savings option, and it also has some restrictions. First of all, you have to qualify for a highly deductible health savings plan. This means your plan should be of $1,300 per individual, and the account should allow you to pay a series of medical costs. Also, you shouldn’t depend on someone else’s tax return or be enrolled in Medicare.

All the contributions you make to a health plan count as reduced tax income. Also, any withdrawals you make from this account to support some medical costs are completely tax free. These contributions can go up to $3,400 per year per individual. If you have a family plan, you can contribute with a maximum of $6,750.

5.      Get rid of those investments that bring you losses

If you sell an investment subjected to the classic tax system, you will have to pay another tax for the profit you gain with the transaction. However, this doesn’t apply anymore if it is a losing investment. You can use these losses to balance the taxes you should be paying for the capital gain resulting from the transaction.

All those losses that exceed the limit will reduce your capital gain and, automatically, your taxes. If you have lost more than you have gained, then you can use up to $3,000 among investments to reduce taxable income. If you still can’t cover all the losses, they will get transferred to the next fiscal years.

6.      Use a 1031 exchange

Taxes are different depending on what you are selling. In some transactions, you can reduce a certain sum of money from the profit you have to pay tax for. However, it doesn’t apply to the selling of investment properties.

Don’t forget about 1031 exchanges, which intervene in investment property selling. Here’s what this exchange says. You have 180 days available to use the gains coming from selling investment properties for similar actions. The 1031 exchange allows you to make the other necessary transactions and delay the payment of taxes related to the sale.

Coins and pens arranged on some papers

Conclusion

You can make plenty of investments to reduce taxable income, and the great thing is that everything is legal. You are allowed to make a series of contributions and transactions which are not subject to traditional taxes. This way, you can avoid paying huge sums of money for big gains, and avoid losing capital in case the transactions weren’t at your advantage.

Image sources: 1, 2, 3, 4.