Six Ways To Protect Your Income From Being Taxed

Six Ways To Protect Your Income From Being Taxed

Most people are not familiar with federal income tax withheld in every paycheck. They neither understand that the more income you make, the more tax is withheld by the IRS.

However, you can reduce your tax burden to almost zero with careful tax planning. This is particularly true if you run a business or have a reasonably high income.

So how much do Americans typically pay in taxes? In 2021, approximately $3.5 trillion was collected by the IRS whereas, it processed more than 240 million tax returns. However, according to the IRS’s latest federal income tax data, most tax burdens fell on the highest income earners.

It is no surprise that the tax code is designed to make high earners pay a higher tax rate. However, these ultra-wealthy people know how to work around laws to lower what they owe the IRS. The CEO of Berkshire Hathaway, Billionaire Warren Buffet, has repeatedly highlighted the disparity between the amount wealthy people must pay. However, in one of the arguments, he famously noted that on a percentage basis, he pays a lot lower taxes than his other employees, including the secretary.

Wondering how it is even possible? Well, a bulk of his wealth is in stock than wage income. And this is just one way to save income from being taxed. So, if you too earn a high income but end up giving out 50% of it in taxes, don’t worry. We’ve mentioned a few strategies you can employ to save your money from being taxed. Even though taxes are difficult to avoid, you may use any of these ways to ward them off strategically.

  1. Hire a professional or upskill

This seems like a no-brainer. If you’re clueless about tax returns and deductions, you’re better off consulting a professional who can help you navigate the entire process. This way, you’ll be better aware of how much you can save by listening to what your tax adviser has to say.

Or, if you have a knack for numbers and tax law, consider upskilling yourself to become more proficient. Education is always an investment with good returns if you use it well. An online tax LLM is easy to complete in a few months. And this flexible mode of learning won’t be a hindrance to your other personal and professional obligations.

  1. Max out your tax-deferred savings

One of the easiest ways to reduce your taxes is to put your money in a tax-deferred retirement account. When you set aside your money in such a manner, you save for a winning retirement, and you also trim your income enough to qualify for a lower tax bracket. Thus, if your organization offers a tax-deferred program such as 401(k), take advantage of it. This way, you won’t miss out on this opportunity, and you can save as much money as you can.

However, if you run your own business, you get a lot of choices for tax-favored retirement accounts. These include 401(k) and Simplified Employee Pensions (SEPs). In this case, contributions cut the tax bill, but the earnings grow tax-deferred for your retirement. Since the limit for the contribution of these programs is high (typically $55,000/year if you are under 50 and $61,000 if you are 50 or above), this can be an excellent shelter for your big earnings to mark your success.

  1. Open a health savings account

A straightforward way to cut off your tax liability is to open a HAS. Set aside an estimated amount every year to cater to your medical expenses. However, to make the most of this strategy, you need to have at least a high-deductible health plan to open an HSA. Once open, you can use your nontaxable funds to cover your out-of-pocket health and medical expenses for the year. In short, you can easily make contributions from your regular paycheck and fund the account while you spend the money as you like and need.

For 2021, the max contribution level for a family is $7200, and for an individual, it’s $3600. These funds continue to grow without paying taxes on the earnings. An additional tax benefit of a HAS is that when you use it to pay for medical expenses, withdrawals are not taxed, either.

  1. Claim tax credits

Several IRS tax credits can help you reduce taxes, like the Earned Income Tax Credit. For instance, a low-income taxpayer can easily claim credits up to $6728 with at least three or even more qualifying children. In the case of two qualifying children, $5980, $3618 with one,and $543 with none.However, in 2022, the credit will rise to $6935 for three or more kids, $3733 with one, $6164 with two, and $560 with none.

Similarly, the American Opportunity Tax Credit offers a maximum of $2500/year for eligible students during the first four years of higher education. In contrast, the Lifetime Learning Credit allows a maximum of 20% credit for up to $2000 per return and $10000 of qualified expenses.

  1. Become an angel investor

Angel investors are people who invest in startups and small businesses. Taking this route allows you to make the most of the tax credit while giving you a nice return on your investment in case the business succeeds.

Being an angel investor, you can easily qualify for a state tax credit that would enable you to write off some portion of your investment instantly. For instance, an angel investor in Colorado who has invested $10,000 and met all other eligibility requirements can receive a tax credit of up to 30% of their investment.

  1. Make a charitable contribution

Are you planning to make a significant gift to charity? Consider giving out appreciated mutual fund shares and stocks you have owned for more than a year instead of cash. Your charitable contribution deduction is the fair market value of the securities right on the date of the gift and not the amount paid for the asset. In addition, it means you don’t need to pay tax on the profit.

However, avoid donating fund shares or stocks that lose money. Instead, it is better to sell the asset, claim the loss on your taxes, and donate cash to charity.


You don’t need to compromise on your hard-earned income with the above-discussed strategies. Even though the current tax brackets vary between 10% and 37%, you can still get away with paying a lot less in taxes if you act smart and claim your tax credits and deductions on time. Whether you are a business owner or self-employed, there are several opportunities for both. So, before you pay thousands of dollars in taxes, consider careful planning. Or hire a financial advisor to slash your tax bill to almost nothing, even if you have a reasonably high income.

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