Tax time is just around the corner. With our federal income tax rates ranging from 10% up to 37%, lowering your income to the next lower bracket can reap great benefits. For as your income jumps, so does your tax rate. Once your taxable income is over $94,300 for married folks the tax rate jumps from 12% to 22%.
Here are some options to bring down your income.
Maximize retirement contributions. This income comes off the top! If your employed – max out your employer retirement plan. With the 401k plan you can contribute up to $23,000, plus $7,500 if over 50. If your self-employed – start with a traditional IRA or Roth IRA of $7,000, plus $1,000 if over 50. For business owners there are other options that offer more of a deduction, however you need to meet the criteria.
Fund a Health savings account. If you have a high deductible insurance policy that qualifies, you can fund an HSA account for $4,150 single or $8,300 for a family policy, plus $1,000 If over 55. You get the deduction when you fund your account, not when you spend it. You never lose this money.
Capital gains. Review your capital gains and capital losses to minimize your overall taxes. If you have capital losses over $3000, consider generating capital gains to utilize the loss. You can only take a $3000 loss; the rest will be carried forward.
Donations. Donate appreciated stock. You can avoid the capital gain income on appreciated stock if you donate the stock directly to the nonprofit (501c3). You receive the fair market value for the donation and avoid the capital gain income. Or consider directly donating a part of your retirement account directly to a nonprofit. This can reduce your taxable income if you are over 70 1⁄2, up to $100,000.
Itemized deductions in most situations will not provide a tax benefit since the standard deduction increased to $14,600 and $29,200. For WI residents pay at least $2500 of real estate taxes each year to qualify for the maximum school tax credit of $300.
Business expenses. Most small business report their income on the cash basis. Pay as many of your expenses by December 31 to claim the deduction that year. Don’t forget to keep track of your business miles on a timely basis.
These suggestions are for discussion purposes. Some of these tax items mentioned have very specific requirements. The requirements can be complicated and may yield different results based on your unique situation.
To learn more about your options – please CONTACT us for a “Tax planning” meeting to understand the full implication of the items mentioned above.
Mary Guldan-Lindstrom, CPA
