Tax Liability

This article looks at ways to help you reduce your income tax liability ...

No one wants to pay more in income taxes than absolutely necessary. There are many ways to reduce your income tax liability and reduce the amount you pay in taxes. These tips can be used each year, but should be reviewed because the limits of many of these tax-breaks changes from year to year.

Invest in your children. If you have savings that earn income and want to avoid including these in your tax liability, invest the money into an account in your minor child's name. Because a small child will not have a tax liability, unless the income from the savings is very large, there will be no taxes paid on the income. However, once the child reaches the age to handle all their own banking, you may want to consider using another tax shelter for these funds so that they are safely put away.

If you give a child, as a gift, stocks or mutual fund shares that have appreciated, you can avoid paying taxes on the amount the stocks and funds have appreciated. This can help you keep the profit from a wise investment. For example, if an investment appreciates by $2,500 in a year, you could pay 15% of that on long-term capital gains tax, costing you $375. But if you give it to your child who has a low tax liability if any liability at all, they would be much smaller. Of course, the child must own the stocks or funds for 12 full months to get this tax break.

Income averaging over several years can also reduce the income tax liability of those who may experience a significantly higher income in a single year that is not expected to repeat annually. This is perfect for someone who sells a second home at a huge profit and would ordinarily have to pay taxes on those proceeds in addition to their regular income. The income tax liability can eat away at the hard earned profit from this sale and cancel out many of the benefits, but by averaging income over several years, the liability is minimal.

The best way for you to reduce your tax liability in your specific situation is to consult with a professional income tax advisor or accountant. There are ways to reduce the amount of income tax you pay each year and professional advice is the only way to know what is best in each circumstance. You may be advised to use specific types of investment tax shelters. You may be informed of alternate ways to create tax shelters for you and your family and reduce your income tax liability.

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