Income Tax Deductions to Preserve Wealth

Taxes are one of the largest wealth destroyers, and there are several income tax deductions that can lower your taxes. By keeping these in mind, you can keep more of your net worth and accelerate your way to financial independence.

While we will share our top recommendations, we also encourage hiring an accountant to help you. Accountants will ensure you minimize your tax obligations, while also making sure you follow tax guidelines.

Maximize Your Retirement Accounts

Retirement accounts such as your 401k, IRA, and Roth IRA allow you to save taxes from capital gains and dividends. The funds grow tax-free until your retirement. Furthermore, your 401k and IRA can even reduce your total taxable income.

The sooner you can start maximizing your retirement accounts, the sooner you can secure your retirement.

Buy a Home

Taxpayers can deduct interest paid on their first and second home mortgages that have up to $750,000 in mortgage debt. For everyone outside of San Francisco and New York, that’s more than enough.

If you have a $500,000 mortgage paying 4.5% interest, you’ll have roughly $22,500 that can be deducted each year. This goes down as you pay more of your principle, but you can always refinance this in the future.

At the 24% tax bracket, which is making over $82,500, you’ll save $5,400 on interest alone. When you think about how to save, this tax savings will really add up.

While this is a great way to save in taxes, we recommend spending no more than 30% of your take home pay on housing. Any higher percentage will compromise your ability to max out your 401k and IRA. Furthermore, spending too much on housing could make you house poor, which is a terrible situation to be in.

Remember, you can deduct these interest expenses on two properties. A rental property near your home could be a great way to generate income while lowering your tax burden.

Maximize to a Health Savings Account

When you contribute to a health savings account, your contributions for unused medical expenses can roll over indefinitely and grow tax free. You can think of this as another retirement account.

With healthcare expenses growing exponentially, we recommend saving as much as you can as early as possible.

Self-Employed Deductions

As the gig economy gains steam, more people will be able to claim self employment deductions. This can include shipping, vehicle mileage, website fees, internet costs, dues, memberships, or any other costs incurred by your business.

An accountant will be able to help you with these expenses, and find others that you may have missed.

Unreimbursed Vehicle Expenses

If you are traveling to satellite offices or for client meetings, you can claim these deductions if you are not reimbursed. This also applies to your self employment or gig economy job. With that said, you are not able to deduct your commuting costs to work.

Sell Your Stock Market Losers

Do you have any stock investments that are beyond repair? Well there is good news, you can claim income tax deductions when you sell them! This is known as tax loss harvesting.

The stock can be deducted from your income if they were sold within a year, and against your capital gains if they have been owned for longer. With that said, the limit to this offset is $3,000.

One great way to manage this is with stocks that killed it. If you sold one investment for a $50,000 gain, you could sell another security for a $20,000 loss, and only owe taxes for the net $30,000. This can reduce your tax bill an incredible amount.

If you decide to harvest the loss, you need to wait 30 days until you buy the stock back. After 30 days, you could buy the security if you believe it has long term potential, while still locking in your loss.

Lifetime Learning Credit

The lifetime learning credit is gold, especially for adults who want to improve their education and training. This credit is worth $2,000 per year, and helps pay for college and education expenses that improve your job skills.

Charitable Deductions

Any donations of cash, goods, and clothing, are all income tax deductions. These deductions add up, so make sure you keep track of your donations throughout the year. Even the cash donations you make to your church, Girl Scouts, or Salvation Army can add up.

Job Hunting Costs

Are you looking for a job? Any costs you incur during your job hunt can be deducted as miscellaneous expenses. Not only will the new job possibly improve your finances and lifestyle, it could also lower your tax bill!

Income Tax Deductions – The Bottom Line

Taxes are one of the largest wealth destroyers, and there are several income tax deductions that will lower your taxes.

By keeping these deductions in mind, you will be able to maximize your tax savings, which will give you more money to invest and achieve your financial independence.