A tax-advantaged account refers to any type of investment or savings account that is either exempt from taxes, tax-deferred, or offers some other type of tax savings unique to the type of account. The way these accounts work vary significantly, but all will offer some type of tax advantage. Some of the most common include retirement plans, education plans such as a 529, and health plans like a Health Savings Account (HSA).
Tax loss harvesting is an effective strategy for investing that you can use all year long in an effort to reduce the amount of capital gains taxes owed on your earnings. This practice is offsetting capital gains with capital losses and can make a big difference in the amount of taxes owed each quarter from the sale of your investments. Not all investments are going to perform as well as you like. When you sell one for a profit, while also selling an under-performing investment at a loss, this will help to balance the taxes you owe in capital gains.
There can be some significant tax savings for married couples. While this is by no means the reason you should tie the knot, it is nice to start enjoying some of the tax benefits that can go hand in hand with marriage. Depending on the income from both spouses, getting married can put the higher earning spouse into a lower tax bracket. When filing your taxes jointly, this can offer significant tax savings over single individuals with the same level of income. The standard deduction is also higher for married couples, versus filing as a single individual. Having this deduction shared jointly can make a difference in the amount of taxes you pay by lowering your total income.
A Roth IRA is a favorite retirement account for many reasons, particularly for the tax advantages that it offers as your money grows and when it is withdrawn. With a Roth IRA, your contributions to the account are after-tax money. This means you are paying taxes on this income up-front. However, as the money then grows in the Roth IRA these earnings are tax-free. You can begin making withdrawals when you reach 59 ½ years of age. These withdrawals are also tax-free. This means that the interest earned from your Roth IRA is not taxed, giving you maximum income in retirement when you may need it most.
As long as your child doesn’t earn more than the standard deduction, $14,600 for the 2024 tax year, they will not be required to file a separate tax return. If your teen earns under $1,150, this is tax-free income. Anything above this will be subjected to taxes. Income earned by your child that is over $2,300 will be subject to the parent’s tax rate. This could mean that a larger amount is taken for taxes. As long as your working teenager is still a minor, relies on you for more than half of their financial support, and lives with you for at least half of the year, you can continue to claim them on your taxes for a dependent deduction.
When you owe back taxes to the IRS, it is important to have an open line of communication with the agency. In most cases, they are willing to work with you to set up a payment plan or negotiate the balance owed. If you neglect to pay or communicate with the IRS regarding your outstanding tax bill, you may face liens on your home and other property, wage garnishment, and even restrictions placed on your passport. If you owe less than $50,000, you may be able to repay this money through the streamlined installation agreement. This allows you up to 72 months to repay the money. You can ask the IRS for an extension to pay, giving you an additional 180 days to gather the funds before paying the bill.
In the event of a death with taxes owed to the IRS, the executors and administrators of the estate are responsible for this debt. In general the IRS can only claim outstanding tax debts that can be taken out of the estate. This means that the executor is not liable personally for any outstanding tax debt. This includes any past outstanding taxes, as well as past and future taxes. Future tax bills may be incurred if the estate includes investments that are earning dividends or a rental property generating income.
Retirement accounts, from 401(k)s to traditional and Roth IRAs, offer lots of opportunities to grow your money with a tax advantage to boot. Participants in traditional 401(k)s, traditional IRAs, and Roth IRAs are not allowed to withdraw funds before age 59 ½ without penalty. If a hardship or life event makes this early withdrawal necessary, the typical penalty is 10% and the money withdrawn is taxed as income at the time it is received.
The biggest factor that determines how much you will pay in taxes is your taxable income. The federal tax system is progressive, meaning you will pay a higher tax rate as you earn more money. However, not all of the money is taxed at the higher rate, as determined by your tax brackets. Your filing status, whether filing your taxes as single, jointly as a married couple, or as head of household will also affect your tax rate. Adjustments and exemptions can help to lower your taxable income, reducing your tax bill. Tax deductions and tax credits can also lower the amount of taxes that you will have to pay for a calendar year.
The money withheld for federal taxes goes to support a variety of expenses and programs. There are three biggest expenditures for the federal government that are funded by our tax dollars. These include health programs such as Medicare and Medicaid, social security, and defense. The largest portion of this tax money is used for healthcare and social security, with more than half of tax money being used to support these programs. Another percentage is dedicated to pay interest on the national debt. The remaining federal tax dollars are used to fund government programs including energy, education, and agriculture.