1. SECTION 401(K) AND 403(B): RETIREMENT PLANS
- What it is: These sections of the tax code allow for tax-deferred retirement savings.
- How to use it: Contribute the maximum amount possible to your 401(k) or 403(b) plan. This reduces your taxable income for the year. Employers often match contributions, which is essentially free money for your retirement. After retirement, withdrawals are taxed as income, but you benefit from the growth of your investments over time.
2. SECTION 529: EDUCATION SAVINGS PLANS
- What it is: This code allows for tax-advantaged savings for education expenses.
- How to use it: Contribute to a 529 plan to save for education expenses. The earnings grow tax-free, and withdrawals used for qualified education expenses are also tax-free. Some states offer tax deductions or credits for contributions.
3. SECTION 1031: LIKE-KIND EXCHANGES
- What it is: This allows you to defer paying capital gains taxes on real estate when you reinvest the proceeds from the sale into a similar property.
- How to use it: If you own investment property, use a 1031 exchange to defer taxes when selling one property and buying another. This allows you to keep more capital working for you.
4. SECTION 179: BUSINESS EQUIPMENT DEDUCTION
- What it is: Allows businesses to deduct the full purchase price of qualifying equipment or software purchased or financed during the tax year.
- How to use it: If you own a business, use this deduction to reduce taxable income by purchasing necessary equipment. This can improve your cash flow while upgrading your business operations.
5. SECTION 125: CAFETERIA PLANS
- What it is: Allows employees to choose from a variety of pre-tax benefits, such as health insurance, life insurance, and flexible spending accounts (FSAs).
- How to use it: Participate in a cafeteria plan to reduce your taxable income by paying for benefits with pre-tax dollars. This can save you money on taxes while providing essential benefits.
6. SECTION 1202: QUALIFIED SMALL BUSINESS STOCK (QSBS) EXCLUSION
- What it is: Provides a tax exclusion on capital gains from the sale of qualified small business stock held for more than five years.
- How to use it: Invest in qualified small business stock and hold it for at least five years to benefit from the exclusion, which can be up to 100% of the gain, depending on when the stock was acquired.
7. SECTION 529A: ABLE ACCOUNTS
- What it is: Allows tax-advantaged savings accounts for individuals with disabilities.
- How to use it: Contribute to an ABLE account to save for disability-related expenses without affecting eligibility for government benefits. Earnings grow tax-free, and withdrawals for qualified expenses are tax-free.
8. SECTION 121: EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE
- What it is: Allows you to exclude up to $250,000 ($500,000 for married couples) of capital gains on the sale of your primary residence.
- How to use it: Sell your home after living in it for at least two out of the last five years to take advantage of this exclusion, reducing or eliminating capital gains taxes.
9. SECTION 199A: QUALIFIED BUSINESS INCOME DEDUCTION
- What it is: Provides a deduction of up to 20% of qualified business income for certain pass-through entities.
- How to use it: If you own a small business or are self-employed, ensure you qualify for this deduction to reduce your taxable income and lower your tax liability.
10. SECTION 1250: DEPRECIATION RECAPTURE ON REAL PROPERTY
- What it is: Imposes a tax on the gain from the sale of depreciated real property that is attributable to depreciation deductions.
- How to use it: Be mindful of depreciation recapture when selling real estate. Proper planning can help minimize the impact, such as through a 1031 exchange or by using other tax strategies to offset the gain.
GENERAL TIPS:
- Tax-Loss Harvesting: Use losses to offset gains, reducing your taxable income.
- Maximize Deductions: Keep detailed records to maximize deductions for business expenses, charitable donations, and other eligible items.
- Consult a Tax Professional: Tax codes are complex and change frequently. A tax professional can help you navigate these codes and create a strategy tailored to your specific situation.
These tax codes offer opportunities to reduce your tax liability, increase cash flow, and optimize your financial planning.
Was this article helpful?
That’s Great!
Thank you for your feedback
Sorry! We couldn't be helpful
Thank you for your feedback
Feedback sent
We appreciate your effort and will try to fix the article