Taxes are a necessary, if disliked part of life. However, many individuals fail to use the tools available to reduce their tax burdens.
Many are not even aware they exist. By taking advantage of existing avenues, individuals can legally lower their tax liability.
By claiming tax credits on their tax return, individuals can lower the amount of income tax they owe and increase their tax refunds. Connecticut provides various credits, such as the Earned Income Tax Credit (EITC) and Property Tax Credit. There are also federal tax credits and deductions.
There are also property tax relief programs for homeowners. For instance, the Homestead Exemption provides a reduction in property taxes for eligible residents. There are tax deductions related to mortgage interest and energy-efficient home improvements as well. Individuals who donate to charity may also be able to claim those donations on their tax returns.
Investing is part of preparing for retirement. By diversifying their portfolios to include investments with tax benefits, individuals can also help themselves tax-wise. Long-term capital gains typically have lower tax rates than short-term gains, so holding money longer can result in less taxes. There are also tax-advantaged retirement accounts like 401(k)s or IRAs. Contributions to these accounts are often deductible. Additionally, earnings within these accounts grow tax-deferred, offering long-term financial benefits.
Parents can also use tax-advantaged education savings accounts such as 529 plans when planning for their children’s futures. Withdrawals for qualified education expenses are tax-free. The state also has the Connecticut Higher Education Trust, which allows an income tax deduction of up to $5,000 and $10,000 for single and joint filers respectively that contribute to the low-cost program for saving for college.
Small business deductions
Small business owners can claim certain business-related expenses to get tax deductions. This includes items used solely for the business and home offices.
According to Business Insider, the average American paid over $16,000 in income taxes in 2020. Taxes cut into people’s spendable income and can be a heavy weight on their wallets, but by using knowledge of available tax breaks, individuals can lower the amount they pay.