Legitimate tax planning and tax evasion are two entirely different matters. The difference lies in the fact that the former is legal while the latter is illegal. Worldway Group advocates for lawful tax payment when investing or settling in the U.S. and opposes tax evasion; however, the U.S. tax system and culture allow for legal tax savings.
The following 12 methods for legal tax savings are worth considering; please consult a professional tax advisor for details.
(1) Adjust Your W-4
The W-4 is a form employees submit to their employers, which determines the amount of tax withheld from their wages each month. If you find that you owe a significant amount of tax when filing your return and it causes a financial burden, you can adjust your W-4 form to increase the monthly tax withholding.
(2) Contribute More to Your 401(k)
The lower your taxable income, the less tax you have to pay. Participating in an employer-sponsored 401(k) retirement plan and allocating a larger portion of your salary to this account is the most common way to lower your taxable income, as the Internal Revenue Service (IRS) does not tax income transferred into a 401(k) account.
(3) Utilize an Individual Retirement Arrangement (IRA)
There are two main types of IRAs in the U.S.: the Roth IRA and the Traditional IRA. Taxpayers can use contributions to a Traditional IRA to reduce their income tax liability. The tax-deductible limit depends on whether the taxpayer or their spouse has a retirement plan provided by an employer.
(4) 529 College Savings Plan
A 529 College Savings Plan is a "diversified portfolio" savings account plan. Any earnings generated within this account are free from state or federal taxes, provided the funds are used for educational purposes. Taxpayers participating in a state- or educational-institution-sponsored 529 plan by opening an account for their children can enjoy state-level tax benefits.
(5) Leverage an Employer-Provided Flexible Spending Account (FSA)
If you have children or dependents in your household that require care, you may consider joining a Flexible Spending Account offered by your employer. Funds deposited into an FSA specifically for the care of children or family members are tax-exempt.
(6) Leverage an Employer-Provided Dependent Care FSA
If you are supporting children under the age of 13, you may consider joining a "Dependent Care FSA" offered by your employer, which has a tax-free limit of $5,000.
Funds in this account can be used to pay for preschool and after-school care, daycare, pre-kindergarten, and day camps. Furthermore, expenses for the care of elderly dependents may also be included.
(7) Utilize a Health Savings Account (HSA)
Those who open an HSA to pay for medical expenses can enjoy tax advantages. An HSA is linked to a high-deductible health insurance plan, and taxpayers can reduce their taxes through contributions to the HSA. Both contributions to and withdrawals from an HSA are tax-free, provided they are used for qualified medical expenses.
(8) Check for Eligibility for the Earned Income Tax Credit (EITC)
If your annual earned income is less than $54,000, it is worth calculating whether you meet the requirements for the Earned Income Tax Credit.
This tax credit is calculated based on the taxpayer's income, marital status, and number of qualifying children.
(9) Charitable Donations
Donations to qualified charitable organizations are tax-deductible, and donated goods can also reduce your tax liability. For example, donated clothing, food, old sports equipment, or household items may all be deductible.
In addition, when volunteering at a qualified charity, out-of-pocket expenses and mileage incurred while traveling to and from the charity can be used to calculate a deductible gasoline expense.
(10) Keep Documentation of Medical Expenses
If you have been hospitalized or incurred significant medical or dental expenses during the tax year, remember to keep your receipts.
Generally, if these medical expenses exceed 10% of your Adjusted Gross Income (AGI), the excess amount may be deductible. In 2016, for those over the age of 65, the threshold was lowered to 7.5%; in 2017, a 10% threshold applied to everyone.
(11) Sell Underperforming Investments
An easy way to achieve legitimate tax savings is to sell stocks or other investments that have lost value, because these losses can be deducted to reduce your total capital gains. The annual limit for this deduction is $3,000, or $1,500 for married couples filing separately.
(12) Timing is Everything
From a tax perspective, actions taken on December 31 versus January 1 can make a significant difference. If you know that upcoming expenses incurred before the end of the year are tax-deductible, act promptly rather than waiting until the following year.
【Friendly Reminder】Reasonable tax savings in the U.S. require detailed planning based on your personal situation and the advice of qualified tax professionals. The "2017 U.S. Investment Summit," co-hosted by the Worldway Wealth Club, the Hong Kong Capital Investors Association, and the Shenzhen Enterprise Investors Association, will grandly take place on March 18, 2017, at the Hilton Shenzhen Futian. U.S. global tax experts will attend to share insights on U.S. taxation and tax reduction strategies. For inquiries, please call: 400-9626-866