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Taxes 2021: Tips for reducing the amount of taxes taken from your income

Here are some tips for reducing the amount of income that you are taxed for.

Video Transcript

- There are lots of strategies as you formulate a tax plan. With any investment, it's usually wise to plan your eventual sale more than a year after your purchase so that any gain is considered a long-term capital gain. As such, it'll be taxed at a lower rate than a short-term capital gain.

Another tax planning approach is to reduce the part of your income that is subject to tax by taking full advantage of the many tax deductions and tax credits available to both businesses and individuals. The self-employed or small business owner, for example, may be able to take advantage of deductions for business meals and entertainment, auto expenses and business travel, among many others. The services of a tax professional can be invaluable.

Keep in mind the difference between a tax credit and a tax deduction. A tax deduction reduces the amount of taxable income you have. A credit reduces the actual tax you owe. Sometimes tax credits are refundable, which means you can get a check from the government if you owe no tax at all.

The most common itemized deductions are mortgage interest, charitable contributions, and state and local taxes. You should always take the higher of your standard deduction or your itemized deduction. The majority of taxpayers take the standard deduction rather than itemizing. Stay financially fit, friends.