6 Strategies to Protect Income From Taxes

Income is taxed at federal, state, and local levels, and earned income is subject to additional levies for Social Security and Medicare. While avoiding taxes entirely is challenging, several strategies can help mitigate their impact. Here are some approaches to consider:

KEY TAKEAWAYS

  • Contributing to qualified retirement and employee benefit accounts with pretax dollars can exempt some income from taxation and defer taxes on other earnings.
  • Long-term capital gains are taxed at lower rates.
  • Capital loss deductions can further reduce your tax burden.
  • Interest income from municipal bonds is generally not subject to federal tax.

1. Invest in Municipal Bonds

Governments fund their obligations, such as maintaining infrastructure and public services, by selling municipal bonds, or “munis.” The key advantage of holding municipal bonds until maturity is that the interest earned is generally exempt from federal, and possibly state and local, taxes if you reside where the bond was issued. This tax-free interest makes munis appealing to many investors.

However, not all municipal bonds are tax-exempt. If purchased at a significant discount, a “de minimis” tax may apply, and the interest and gains from this discount are taxed as regular income. Despite typically offering lower interest rates, municipal bonds have a lower historical default rate compared to corporate bonds, making them a safer investment option.

2. Aim for Long-Term Capital Gains

Investing in stocks, mutual funds, bonds, and real estate can be a significant tool for wealth growth, partly due to favorable tax treatment on long-term capital gains. Assets held for more than a year are taxed at preferential rates of 0%, 15%, or 20%, depending on your income level. In contrast, short-term gains are taxed at regular income tax rates.

For 2024, the zero rate bracket for long-term capital gains applies to taxable income up to $94,050 for married couples filing jointly and $47,025 for single individuals. Utilizing strategies like tax-loss harvesting can offset capital gains taxes by allowing deductions for losses, with excess losses over $3,000 carried forward to future tax years.

3. Start a Business

Running a side business can offer numerous tax advantages alongside additional income. Many business-related expenses, including health insurance premiums for self-employed individuals, can be deducted from income. Home office deductions, when properly claimed, can reduce taxable income by deducting a portion of utilities and Internet expenses.

To claim these deductions, the IRS requires proof of a profit motive, typically demonstrated by showing a profit in three out of five years. Additionally, the SECURE Act of 2019 offers tax incentives to employers who join multiple-employer plans and provide retirement options for their employees.

4. Maximize Retirement Accounts and Employee Benefits

Contributions to retirement accounts like 401(k) or 403(b) plans can significantly reduce taxable income. In 2023, contributions up to $22,500 (rising to $23,000 in 2024) are allowed, with an additional $7,500 catch-up contribution for those aged 50 or older. This means an employee earning $100,000 who contributes the maximum amount can reduce their taxable income substantially.

For those without employer-sponsored retirement plans, contributing up to $7,000 ($8,000 for those 50 and older) to a traditional IRA in 2024 can offer tax benefits. The IRS provides specific guidelines on how much of these contributions can be deducted based on adjusted gross income and participation in other retirement plans.

How Can I Reduce My Taxable Income?

Experts recommend several strategies to reduce your taxable income. These include contributing to employee benefit plans like a 401(k), health savings accounts (HSA), flexible spending accounts (FSA), and traditional individual retirement accounts (IRA).

How Much Should I Contribute to My 401(k) to Reduce My Taxes?

401(k) accounts allow pre-tax contributions, meaning the money you contribute is not taxed at the time of contribution. This lowers your taxable income, resulting in a smaller tax bill. The more you contribute to your 401(k), the more you reduce your taxable income and tax liability.

What Deductions Does the IRS Allow for the Self-Employed?

The IRS permits self-employed individuals to deduct several expenses. These include costs associated with home offices, vehicles, cell phones, contributions to self-employed retirement plans, and self-employed health insurance premiums.

The Bottom Line

While it is crucial to pay the taxes legally required, there is no need to pay more than necessary. Spending some time researching on the IRS website (IRS.gov) and reputable financial information sites can potentially save you significant amounts in taxes.

Consulting with a tax professional is also advisable before claiming deductions on your tax return. This ensures you meet all qualifying rules and can confidently enjoy the savings from your diligent tax planning.

2024 Federal Income Tax Brackets, Standard Deductions, and Tax Rates

Every year, the Internal Revenue Service (IRS) updates federal income tax rates, allowances, and thresholds to reflect inflation adjustments. For individual taxpayers filing for the 2024 tax year in 2025, the highest tax rate is set at 37%. Standard deductions, tax bracket ranges, other deductions, and phaseouts also undergo annual inflation adjustments.

Key Takeaways:

  • The IRS annually revises federal tax rates, allowances, and thresholds for inflation.
  • Taxpayers can claim a standard deduction to lower taxable income and an additional deduction if they are 65 or older and/or blind.
  • Federal tax brackets for 2024 range from 10% to 37%.
  • Various individual tax credits are available, including the earned income credit and the qualified adoption expenses credit.
  • Contribution limits to tax-advantaged retirement accounts typically change each year.

Federal Tax Rates and Brackets

For the 2024 tax year, there are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The highest income earners fall into the 37% bracket, while those with the lowest incomes are taxed at 10%. The tax rates and brackets for 2024 are detailed in the following chart.

Standard Deduction

The standard deduction is a specific amount that taxpayers can use to reduce their taxable income when filing their annual tax returns. Taxable income is calculated as your adjusted gross income (AGI) minus any itemized deductions or the standard deduction.

2024 Standard Deductions

For the 2024 tax year, the IRS has set the standard deduction amounts as follows:

  • $14,600 for single filers
  • $14,600 for married couples filing separately
  • $21,900 for heads of households
  • $29,200 for married couples filing jointly
  • $29,200 for surviving spouses

Additionally, individuals who are aged 65 or older or are blind can claim an extra standard deduction of $1,550. This amount increases to $1,950 for unmarried individuals who are not surviving spouses. Dependents can claim a standard deduction of $1,300 or $450 plus their earned income, whichever is higher.

Capital Gains

Capital gains tax rates are generally lower than ordinary income tax rates, but they vary based on the taxpayer’s taxable income and filing status. The maximum adjusted capital gains rates apply to both regular income tax and the alternative minimum tax.

For the 2024 tax year, you will need to pay capital gains tax if your income exceeds

  • $94,050 for married couples filing jointly
  • $47,025 for married couples filing separately
  • $63,000 for heads of households
  • $47,025 for single filers

The 15% capital gains rate applies to adjusted net capital gains for:

  • Joint returns up to $583,750
  • Married individuals filing separately up to $291,850
  • Heads of households up to $551,350
  • Single filers up to $518,900
  • For any income above these thresholds, the applicable capital gains rate is 20%.

Individual Tax Credits

Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is adjusted annually for inflation. For the 2024 tax year, the maximum EITC for taxpayers with three or more children is $7,830. For married couples filing jointly, the credit begins to phase out at an adjusted gross income (or earned income, if higher) of $29,640 and phases out completely at $66,819.

Qualified Adoption Expenses

For 2024, the credit for qualified adoption expenses, including the special credit for adopting a child with special needs, is set at $16,810. Additionally, the exclusion from an employee’s income for qualified adoption expenses paid or reimbursed under an employer plan is also increased to $16,810.

Lifetime Learning Credit

The Lifetime Learning Credit (LLC) provides a maximum of $2,000 per return for qualified educational expenses for a taxpayer, spouse, or dependent. This credit phases out for taxpayers with a modified adjusted gross income (MAGI) exceeding $80,000 ($160,000 for joint returns). Unlike other credits, the LLC has not been adjusted for inflation in recent years.

Foreign Earned Income Exclusion

The foreign earned income exclusion amount for the 2024 tax year is set at $126,500 by the IRS.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) applies to income above certain exemption levels, calculated by adding back specific tax benefits to regular taxable income. For the 2024 tax year, the AMT exemption levels are:

  • $133,300 for joint returns
  • $85,700 for unmarried individuals
  • $66,650 for married individuals filing separately

These exemption levels phase out at:

  • $1,218,700 to $1,751,900 for joint returns
  • $609,350 to $952,150 for unmarried individuals
  • $609,350 to $875,950 for married individuals filing separately

The AMT rate is 28% for alternative minimum taxable income up to $232,600 for joint and single filers ($116,300 for married individuals filing separately) for the 2024 tax year.

What Are the 2024 Tax Brackets?

The IRS has maintained the same seven federal tax brackets for 2024: 10%, 12%, 22%, 24%, 32%, 35%, and the top bracket at 37%. However, the income thresholds for these brackets have been adjusted upward to account for inflation. The amount of tax you owe will depend on your income and your filing status, such as single filer or married filing jointly.

How Did Standard Deductions Change for the 2024 Tax Year?

The standard deduction amounts have increased for 2024. The IRS has set the standard deductions as follows:

  • $14,600 for single filers
  • $14,600 for married couples filing separately
  • $21,900 for heads of households
  • $29,200 for married couples filing jointly
  • $29,200 for surviving spouses

Did the Child Tax Credit Change?

The child tax credit reverted to pre-2021 levels in 2022. For the 2024 tax year, the refundable portion of the $2,000 child tax credit for each child under 17 has been adjusted for inflation and is now $1,700.

The Bottom Line

Each year, typically in November, the IRS announces adjustments for federal taxes for the upcoming tax year. These adjustments include changes to tax brackets, standard deductions, tax credits, and more. Staying informed about these updates is crucial to ensure accurate tax filing and to avoid overpayment or underpayment.

Community Property: Definition and Application in U.S. Law

What is Community Property?

Community property is a legal concept in some U.S. states that pertains to the ownership of assets acquired during a marriage. Under this system, any income and any property, whether real or personal, obtained by either spouse during the marriage are considered jointly owned by both partners.

Key Points:

  • Community property is a state-level legal distinction in the U.S. that affects married individuals’ assets.
  • In community property states, any income or property acquired by either spouse during the marriage is owned equally by both partners.
  • This means that all earnings and debts are shared equally between spouses, irrespective of who earns or spends the money.
  • Nine states in the U.S. have community property laws: California, Arizona, Nevada, Louisiana, Idaho, New Mexico, Washington, Texas, and Wisconsin.
  • Some states treat assets acquired before marriage, gifts, and inheritances differently from those acquired during the marriage.

Understanding Community Property

Community property laws ensure that both spouses have equal ownership of all marital assets. This includes all financial and real estate assets acquired during the marriage. In states like California, community property is divided equally, with each spouse receiving 50% of the assets deemed marital property. In other states, such as Texas, a judge may divide the assets in a manner they deem fair.

Assets received as gifts or through inheritance by one spouse are usually excluded from community property. Additionally, assets owned by one spouse before the marriage are generally not considered community property, although some jurisdictions may allow these assets to be converted into community property. Debts incurred during the marriage are typically considered community property as well.

For instance, an Individual Retirement Account (IRA) accumulated during the marriage would be considered community property. Typically, the spouse of the account owner must be the primary beneficiary unless they consent in writing to designate someone else.

Origins of Community Property

The concept of community property aims to protect the rights of both spouses. It is believed to have roots in Spanish law, which itself was influenced by Roman civil law and the Visigoth Code. The idea also has traces back to ancient Egypt and Greece, with some aspects recorded in the Code of Hammurabi.

Community property laws evolved significantly through Roman times, where initially, wives could not own property. Later Roman laws allowed wives to own property, leading to the development of dowries and similar practices. After the fall of the Roman Empire, Spanish law continued to develop community property principles, which were eventually adopted in various forms in the United States. For example, California recognized community property formally in 1849.

States with Community Property Laws

In the U.S., nine states have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Each state has specific regulations defining community property and its management. For example, some states accept domestic partnerships as alternatives to marriage.

Alaska offers an optional community property system, allowing spouses to designate some or all marital property as community property through agreements. Tennessee and South Dakota have similar systems. Kentucky and Florida have also implemented community property trust laws, and Puerto Rico, along with several Native American jurisdictions, recognizes community property.

Community Property and Estate Planning

Estate planning often involves navigating community property laws, especially during significant life changes such as moving to a different state, death, or divorce.

  • Change of Domicile: Moving to a non-community property state terminates the community property estate, as the household no longer falls under community property law.
  • Death: Upon the death of a spouse, community property states typically entitle the surviving spouse to the deceased’s share of the community property. Specific rules vary by state.
  • Divorce: Community property estates usually end upon divorce or legal separation. In some states like California and Washington, physical separation with the intent to end the marriage can terminate the community property estate. The burden of proving this intent lies with the party claiming the termination.

What Is and Isn’t Included in Community Property?

Community Property: Inclusions and Exclusions

The specific assets considered community property can vary from state to state. For instance, in California, any property acquired by a married person during the marriage while domiciled in the state is considered community property. Conversely, certain properties are excluded from community property. For example, Idaho classifies the following as separate property:

  • Property owned by either spouse before marriage.
  • Property received as a gift or inheritance, even during marriage.
  • Property acquired with separate-property funds.
  • Property acquired while domiciled in a separate property jurisdiction.
  • Property listed in a valid prenuptial or postnuptial agreement.

Variations to Community Property

Different jurisdictions and countries have adopted variations of community property laws, including:

  • Community of Acquests and Gains: Each spouse owns a half interest in property acquired during marriage, excluding gifts, inheritances, property acquired before marriage, and property acquired while living apart.
  • Community of Profit and Loss: Similar to acquests and gains, but with separate liabilities for debts.
  • Limited Community Property: Similar to acquests and gains, but with more properties treated as separate.
  • Absolute Community Property: All property, including pre-marital, is considered community property, with exceptions for protecting heirs from previous marriages.

Drawbacks of Community Property

There are several potential downsides to community property:

  • Debt Liability: Both spouses are typically held equally responsible for debts incurred by either spouse, which can be problematic if one spouse accumulates substantial debt without the other’s knowledge.
  • Financial Inequality: The equal sharing of assets can lead to feelings of unfairness, especially if one spouse contributes more financially.
  • Creditor Risk: Jointly owned assets can be pursued by creditors in the event of default on debts, meaning specific assets may not be protected.

Can I Avoid Community Property Laws in Community Property States?

Avoiding community property laws depends on the state’s specific regulations. In some cases, a spouse can be disinherited if explicitly stated in a will or agreed upon in a prenuptial agreement. Consulting legal counsel familiar with state laws is advisable for specific situations.

What Is the Opposite of Community Property?

The opposite of community property is common law. Under common law, individuals maintain separate legal and property rights, regardless of marital status. Each person is treated as an individual rather than as part of a marital unit.

Does Community Property Include Debts?

Yes, community property includes debts. Creditors can claim part or all of a community property estate, depending on state laws. This means that debts incurred by one spouse can affect the jointly owned assets.

The Bottom Line

Community property law dictates that income and assets acquired during a marriage are jointly owned, regardless of individual contributions. Nine states have adopted community property laws, which often dissolve only through death, divorce, moving out of a community property state, or physical separation.

Government-Owned Property: Definition, Examples, and Types

What Is Government-Owned Property?

Government-owned property encompasses land and assets owned by federal, state, or local governments, as well as properties managed by government agencies or organizations like libraries and parks.

Key Points:

  • Government-owned property refers to land or assets legally owned by government entities.
  • These properties can be owned at various government levels—federal, state, or local—and may not always be accessible to the public.
  • Examples of government-owned properties that serve as public goods include parks, libraries, roads, and utility infrastructure.

Understanding Government-Owned Property

Government-owned property is often seen as “public” property, but this doesn’t mean it is always open for public access. For instance, military bases and research labs are government properties with restricted access, whereas public parks are typically open to everyone.

Property rights define ownership and usage of resources, which can be tangible or intangible and owned by individuals, businesses, or governments. Government property can range from residential and commercial land to physical assets like machinery. These properties can be acquired through purchases, tax foreclosures, or other means. Examples include consulate buildings and embassies managed by the federal government.

Some government-owned properties are public goods, funded by taxes, and available for public use without reducing their availability to others. Public goods include services like law enforcement, national defense, and public infrastructure such as libraries and parks, all of which are typically funded publicly.

Special Considerations

Investors can purchase government-owned properties at auctions, often at favorable prices. For instance, equipment seized from a bankrupt manufacturer may be auctioned at a lower price than new equipment, offering opportunities for buyers.

Government-Owned Property vs. Private Property

Unlike government-owned property, private property is owned by individuals or corporations. The concept of private property is rooted in 18th-century philosopher John Locke’s theory of homesteading, where ownership is established through labor and cultivation. Modern property acquisition typically occurs through trade, inheritance, or other voluntary means.

Private property rights are fundamental to capitalist economies, allowing owners to exclude others from using their property. These rights enable owners to use, benefit from, and exchange their property as they wish.

In contrast, government-owned properties often serve public purposes and may have different access and usage restrictions.