Get Ahead of the Curve
Many people wait until the end of the year or January to start thinking about their Federal taxes but with a little bit of guidance and planning, you can properly prepare and avoid any tax surprises.
In August of each year you’ll have over 7 months of information to use for tax planning which will allow you to estimate your taxes owed over the remaining 5 months. Doing this can help you plan for the end of the year and into next year. Higher income taxpayers should check to see if itemized deductions will get phased out. Perhaps you’ll be subject to alternative minimum tax or maybe you’re subject to extra medicare taxes that went into effect on January 1, 2013. This tax was for individuals having modified adjusted gross income of $200,000. If any of these apply to you, it would be wise to start to look at ways to defer income. Also, look for ways to speed up deductions. Finally, look for ways to defer income down to lower tax brackets.
High-Income Tax Year?
Consider deferring income. Taxpayers put in place this strategy by pushing income into the next calendar year. This can be helpful if you had a high earning year and expect to make less next year. Ask employers to defer bonuses until after January 1st or take stock options in January rather than December. If there are any assets you’re considering selling at a gain you may want to wait until January.
Deferring doesn’t always make sense so look at it from a big picture perspective. If you’re far into a high-income tax bracket there may not be an easy way to lower it. If your right on the edge of a high-income tax bracket, you may be able to make some changes.
Consider accelerating deductions. Charitable contributions can lower your tax bracket and Real estate can also be a powerful tool to use. By pushing payments into December, you can often lower your tax liability. If you’re planning on increased earnings you may consider putting off some deductions. If you’re subject to the alternative minimum tax, you may not receive a benefit for certain deductions.
Consider deflecting income to family members in lower tax brackets. If you have children who are in a lower tax bracket, it may make sense to gift certain assets to them. You can gift up to $14,000, per child, per year, tax-free. They can then sell the assets and pay taxes on that sale at their lower rate. Most children are in a zero tax bracket for capital gains. So, this strategy can pay off. Other gifting options are:
- Max out retirement, college-saving contributions. Consider increasing your 401(k) contributions, IRA, or other pre-tax plans.
- If you’re self-employed, you may be able to deduct much more by contributing to a SEP-IRA
- Make all of your 529 college savings plan contributions before the end of the year.
- If you have a college-aged son or daughter who works, give them a Roth IRA contribution. This is a way to help them start saving for retirement.
- Finally, contribute to charity. Think about giving appreciated stock that you’ve held for more than 12 months. You get a deduction for the full value of the contribution and you don’t have to pay tax on the appreciation. You can actually get more cash into the hands of the charity this way; it’s a gift that gives back.
Whether you’re a high or low income earner, tax planning is crucial to your overall financial outlook. These tips are among just a few that can help you pay less to the government and more towards your own retirement.
Jay Finn, CPA provides tax and accounting services to thousands of businesses, business owners, & individuals. Our specialists are experts in tax law, IRS representation, business accounting, & investment strategies to help you and your business grow financially.