Reducing Your Taxable Income
Do you live or work in South Dakota, United States? If so, it is important to understand tax laws in this state. This allows you to be able to pay all the taxes you are obliged to. As a true citizen of the country and the state, you need to show patriotism and responsibility by paying all the imposed taxes to allow the government to offer all the necessary services.
South Dakota features one of the only states with the lowest per capita total tax rate in the United States of America. It does not levy corporate or personal income taxes, inheritance taxes, or taxes on individual intangible properties. To help you understand more about taxation in South Dakota, this article looks at the various forms of income tax and how you can reduce your taxable income. Before looking at the multiple ways you can reduce taxable income, let's look at all forms of income tax levied in South Dakota.
Income Tax Laws in South Dakota
Personal income tax refers to the tax levied by the government on individuals depending on their taxable income. Generally, taxable income is usually determined by taking your total personal income and applying all the necessary deductions. Depending on various circumstances, you may also get credits.
Most states usually levy personal income tax on top of the federal individual income taxes that the Internal Revenue Service collects. Several states do not collect personal income tax, including Wyoming, Tennessee, Texas, Alaska, Florida, Washington, the State of New Hampshire, and South Dakota.
South Dakota Corporate Taxes
One of the things you need to know is that South Dakota does not collect corporate income tax and personal income tax. This is why South Dakota is the friendliest state in the country in terms of income taxes.
Bank Franchise Tax
This is an excellent exception to the general absence of significant business taxes in South Dakota, as it is a tax bill that applies to many financial institutions. The tax is usually based on the net income earned by the various institutions. It is assessed at some series of progressively reduced marginal rates.
As mentioned above, South Dakota does not levy personal income taxes. However, this does not mean that the citizens do not pay taxes altogether. If you reside in this state, you can be subject to pay both federal and consumer taxes. According to the fundamental tax law, all states and federal governments are allowed to tax both unearned and earned personal income.
Earned income comprises your salary from your job, including commissions, tips, wages, and other bonuses. On the other hand, unearned income is the revenue you get from non-employment sources such as dividends, interest, and profits you make from royalties, asset sales, and gambling winnings.
State Sales Tax
You should pay sales tax if you are involved in a business or an organization engaged in retail sales such as leasing, selling, renting properties, sales of services, or products transferred electronically.
Ensure that you get a sales tax license and remit all the applicable taxes. Note that motor vehicles are not subjected to local and state sales taxes. The cars are subject to a 4 percent motor vehicle tax based on the buying price.
Municipal Sales Tax
Most towns and cities in South Dakota usually have local sales tax in addition to state tax. The amount you pay in municipal sales tax depends on the city you live in. In general, gross receipts subjected to state tax are also subjected to municipal tax. These taxes are all collected by the Revenue Department.
A single tax return usually takes care of both local and state sales taxes. It is also worth noting that cities in South Dakota can implement a one percent municipal gross receipt tax on alcoholic drinks and meals sold in restaurants.
Use tax in South Dakota applies when sales tax is not paid on services or goods that are taxable in the state. The rate levied on user tax is similar to the sales tax rate, both for the municipalities and the state.
Real Property Tax
The local real property taxes in the state vary from 1 to 3 percent of the structure's market value. Most of the rates usually fall at 2 percent. However, it is also good to know that five-year property tax abatements are provided on new structures, or any additions done to the existing ones.
County commissions in the state have the right to forgive from 0 to 100 percent of the property taxes on new structures or additions you make on your property. The abatement is available on all non-residential agricultural, commercial, and industrial facilities.
Reemployment Assistance Tax
Reemployment assistance refers to money given to those who are no longer employed to support themselves until they can find another job. If you are an employer in the state, you are supposed to pay reemployment assistance on the first fifteen thousand dollars you pay to each of your employers in a calendar year.
For all the employers, the rates are usually based on experience level and reduce with time if you maintain a positive account balance.
Top Tips for Reducing Your Taxable Income
It is challenging to avoid income taxes in South Dakota. However, you can apply a wide range of strategies to reduce your taxable income. Here are some of the most effective ways to do so.
Invest in Municipal Bonds
When you buy municipal bonds in South Dakota, it means that you are lending to the state and the local government for a specific number of interest payments over a certain period. Once the bonds mature, the entire amount of the amount you invested is repaid to you. Note that the federal government does not tax interest earned on the bonds. It may also be exempt at the local and state level. This is the reason why municipal bonds are attractive to investors in South Dakota.
Open a Business
Besides creating extra income, opening a side business offers you a wide range of tax benefits. The expenses you sustain over the course of your daily business are deducted from your income. This helps reduce your total income tax obligation. If you are self-employed, some of the most vital tax deductions are health insurance premiums available if you meet the unique requirements.
If you follow the guidelines provided by the Internal Revenue Service, you may also deduct a fraction of your home expenses together with the home office deduction. A part of the internet and utilities used in your business can also be deducted from your income.
To make these claims, you should ensure you are running a company to make a profit. The Internal revenue service will evaluate several factors to determine if you are engaged in a business for profit.
Have a Flexible Spending Account
If you are employed, your employer can provide you with Flexible Savings Accounts known as flex plans. With these plans, you can save a lot of pre-tax dollars to spend tax-free on dependent or health care expenses. For instance, if you have two thousand dollars in your spending account for things like prescription drugs, hearing aid batteries, over-the-counter medications, or counseling sessions, you make these expenses with money that you never get taxed.
With the flexible spending account, your money would be taxed, thus reducing the buying power. However, you should ensure that you use most of the money you contribute to the account in a year, or you end up losing the entire amount forever.
Open a Retirement Account
You can also reduce your taxable income by having a retirement planning strategy. You can open a retirement account like the 401(k) Plan or Roth IRA. This does not only help you reduce your tax but also allows you to save for your retirement, which is something that everyone must do in a great way. Here you will contribute pre-tax money, which reduces both your taxable income yearly and your taxes. The funds will increase in your account, and when the time to withdraw comes, it is only taxed at your income rate at that time.
Open a Health Savings Account
A health savings account is better than a medical expense flexible spending account. Like the flexible saving account, you will finance the health saving account with your pre-tax money, thus reducing your taxable income. The money saved in the account can be spent tax-free for all qualifying healthcare expenses.
The difference between the two is that you do not have to use all of it every year for the health savings account. You can allow your savings to accumulate for many years. The money can grow by investing your fund in the market.
When you reach sixty-five years, you can withdraw the money from your account for any purpose. You just pay the ordinary income tax rates on the amount you withdraw. However, you need to have a high qualifying deductible health insurance plan to use a health savings account.
Ensure You Claim All Deductions
Regardless of the amount you receive or earn in a year in South Dakota, bear in mind that all of it will be taxed. You should reduce it through one or several reductions so that you can get the taxable income. Therefore, you should make sure that you claim all your deductions to reduce the taxes.
You can go for a standard deduction or opt to itemize the deductions in which you add up individual deductions that you qualify for. This will help you if your itemized deductions are higher compared to the standard deduction. The standard deduction is usually the best way to reduce taxable income in South Dakota.
An alternative way of reducing your taxable income is by taking several deductions. There are several possible deductions associated with owning a business or home, being a student, or being self-employed. You can also make some of the deductions without itemizing, including contributions to a health savings account, retirement account, student loan, divorce, and self-employment taxes.
You can also save some money by honing your income tax strategies throughout the year, not only during tax season. You need to designate a place where you can put all your tax documents and receipts. This helps to prove your purchases for deductible items, medical expenses, childcare, charitable donations, and other financial transactions. Add all the forms you get from your brokerages, banks, and employers reporting the income you have received. Have a system that helps you save time and reduce issues as you prepare to file your tax returns. Keep these forms and documents for many years to help in case the internal revenue service has questions.
Claim Tax Credits
To get all the available tax deductions, you should also ensure that you take advantage of all the tax credits provided. Note that credits are even more beneficial in reducing tax income than tax deductions. These deductions are more valuable because they help in shrinking your taxable income. The tax credits usually exist in education expenses, adopting children, energy-efficient home improvements, foreign taxes paid, and many others.
Donate to Charity
Donating goods and money to charities is a win-win proposition. This is because the charities get the necessary support, and you also get a tax break from the contributions you make through a tax deduction. As you make your donations, there are certain rules you should follow to enjoy the tax deductions. The non-government organization you contribute should be qualified to be a charitable status under the internal revenue code.
There are some organizations that you cannot donate to since you will not enjoy the tax reduction. They include fraternal societies, business leagues, political organizations, and social clubs. You can always check the charities that qualify on the IRS website. For property or cash donations, you will require payroll deduction records, bank records, or a written acknowledgment from the organization showing the amount you have contributed.
It is not only the cash donations that can help you enjoy tax deductions. You can also donate goods that can help you qualify. You can donate all kinds of things, including handbags, books, coffee makers, laptops, furniture, rugs, and microwaves. You can also donate your car, although there are certain conditions for car donations. In addition, you can give donations for stock and enjoy tax reductions for the same.
It is better to donate shares of specific stocks that are rising in value in your portfolio than those that are not doing well in the market. This is necessary because you will be giving away the gains, which you would eventually be taxed. Most charities in South Dakota are also willing to get stocks, cryptocurrency, and bonds.
Hold Your Investments for Long
As you know, time is money. If you hold a stock for eleven months, this can be termed as a short-term investment. Short-term capital gains are taxed at the normal taxable rates. However, if you can hold the investment for a long time, let's say more than a year, it is considered a long-term holding by the IRS. Thus, you enjoy a greater income tax reduction.
However, you should not only hold the investment for a long time just for tax purposes. For instance, if the company is facing financial challenges, you should not hold the investment for long since the stock may lose value.
Time Your Mutual Fund Investments Well
Mutual funds are usually popular among many people in South Dakota; they can be invested immediately on a wide range of bonds and stocks. You can decide what to buy and sell and when to do it. It is also possible for you to have money in mutual funds in your retirement account. To enjoy the tax benefits, you should invest in the funds at the right time.
Avoid doing it at the end of the year because most funds distribute dividends in December. At this time, the fund shares usually fall because the value is distributed to many shareholders. You end up being hit by a tax bill for an investment you have just done for a short time. To avoid this tax and enjoy a reduced price, you should ask the mutual fund company when they are doing the distribution and buy after that period.
Purchase a Home with Mortgage
For most individuals, purchasing a home is not only a great achievement but also a great investment. The process involves receiving a mortgage which is a loan from a bank. With a mortgage, it means you have to make monthly payments and also pay a significant interest.
However, you should know that the interest for your mortgage is deductible. You can deduct the complete amount of interest you pay per year, which adds to a lot of money. However, note that to claim the deductions, you should itemize them. The same case applies to student loans.
Use the Correct Filing Status
You should not assume that you can file your taxes with a single filing status because you are unmarried. If you support a dependent or are a single parent, you can qualify for a head of household status that helps you enjoy reduced income tax rates and high standard deduction. The high standard deduction means that your taxable income becomes smaller, leading to lower taxes. If you are married, you should check out to find out if it is more cost-effective for you to file separately or jointly. In most cases, if you file jointly, you might get a bigger refund.
Need Help Filing Tax Forms?
The IRS or Internal Revenue Service implements the federal income taxes in the whole country. You will get the forms and all the necessary publications online. Apart from consumer taxes, there are other tax obligations that you need to meet in the state. You can hire the best tax experts in South Dakota to help file the forms correctly and get other income tax advice. They can also advise you on alternative ways you can reduce your taxable income.