You don’t want to pay more in federal income tax than you have to. With that in mind, here are five tax planning for income options to consider when it comes to keeping more of your income.
Delay Income to Reduce Tax Liability
Delaying income to a later year can be a smart strategy to minimize your current income tax liability. By deferring income, you can potentially invest the funds that would have been allocated for taxes. This tactic might also place you in a lower income tax bracket when you eventually report the income.
Certain retirement plans offer opportunities to postpone taxes on earned income. For instance, with a traditional 401(k) plan, you contribute a portion of your salary pre-tax, and taxes are only due upon withdrawal. This allows for tax-deferred growth on your investments.
Explore other options to delay taxable income, such as contributing to a traditional IRA, purchasing permanent life insurance with tax-deferred cash value growth, or investing in specific savings bonds. Consult with a tax professional to explore the best tax planning strategies for your situation.
Income Shifting Within the Family
Lowering your family’s overall tax burden can be achieved by transferring income to family members in lower tax brackets. For example, if you own stocks generating dividend income, consider gifting these stocks to your children. After the transfer, dividends will be attributed to them, potentially reducing your family’s tax burden.
However, be cautious of the kiddie tax rules, which tax children’s unearned income over certain thresholds at their parents’ tax rates. Additionally, familiarize yourself with state laws before transferring securities to minors. Other methods of income shifting include hiring family members for the family business or establishing a family limited partnership.
Strategic Deduction Planning
Effective deduction planning involves proper timing and control over your income. Decide whether itemizing deductions or taking the standard deduction is more advantageous for you.
Some deductions, like medical expenses, are only allowed if they exceed a certain percentage of your adjusted gross income (AGI). To lower your AGI, consider deferring income to the next year, investing in tax-exempt income-generating assets, or maximizing contributions to qualified retirement plans.
Timing deductible expenses can also be beneficial. If you anticipate being in a higher tax bracket this year compared to the next, consider accelerating deductions into the current year. This can be achieved by paying deductible expenses or making charitable contributions before the year-end.
Tax-Conscious Investment Strategies
Minimize taxes by making investment decisions with tax implications in mind. Explore strategies like investing in tax-exempt securities and timing the sale of capital assets for maximum tax benefit.
Certain investments generate income exempt from federal or state taxes, such as specific Series EE bonds or municipal bonds. Long-term capital gains tax rates are often lower than ordinary income tax rates, incentivizing investors to hold assets for more extended periods before selling them. Consult with a financial advisor to determine the best investment options for your tax situation.
Year-End Tax Planning
Year-end tax planning aims to optimize your tax situation by timing income and deductions strategically. This may involve postponing income to the following year or accelerating deductions into the current year, depending on your marginal tax bracket.
For example, if you anticipate a lower tax bracket next year, postponing income receipt can result in lower overall taxes. Similarly, scheduling deductible expenses, like major dental work, before the year-end can maximize tax deductions for the current year.
Tailor your year-end tax planning moves to your individual circumstances, and consider consulting with a tax professional for personalized advice.
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CS West & Associates, located in the Brandon area of Tampa Bay, is well qualified to advise you on all your tax planning and accounting needs. If you need assistance, please contact us today 813-344-1784
