Which of the following strategies can help reduce tax liability?

Choosing deductions, credits, and tax-deferred accounts is an effective strategy to reduce tax liability for several reasons. Deductions allow taxpayers to subtract specific expenses from their total income, thereby lowering the amount of income that is subject to taxation. Common deductions include mortgage interest, student loan interest, and certain business expenses.

Tax credits directly reduce the amount of tax owed and can offer significant savings. For example, credits for education, dependents, and energy-efficient home improvements can make a considerable difference in a taxpayer’s liability.

Tax-deferred accounts, such as RRSPs (Registered Retirement Savings Plans) in Canada, enable individuals to contribute money that won’t be taxed until it is withdrawn, usually in retirement when they may have a lower income, further minimizing the tax burden over time.

This multifaceted approach not only provides immediate benefits through reduced taxable income but also offers long-term advantages in retirement savings, making it a comprehensive strategy for managing tax liability effectively.