Tax time is just around the corner. Thankfully, the new tax law passed and our rates did not go up as expected. We even get to keep the Qualified Business Income deduction through 2026. With federal tax rates ranging from 10% to 37%, lowering your income into the next bracket can make a big difference — the higher your income, the higher your rate. For example, once your taxable income exceeds $94,300 for married couples, the rate jumps from 12% to 22%. Here are some options to bring down your income:
Maximize Retirement Contributions.
This deduction comes right off the top. If you’re employed, max out your employer retirement plan. Many plans offer an additional catch-up contribution if you’re over 50. Business owners may have other options with larger deductions, depending on eligibility.
Fund a Health Savings Account.
If you have a qualifying high-deductible health plan, you can fund an HSA — plus there’s a catch-up if you’re over 55. You get the deduction when you fund the account, not when you spend it. And you never lose the money.
Capital Gains.
Review your capital gains and losses. If you have losses over $3,000, consider generating gains to use them. You can only deduct $3,000 per year; the rest carries forward.
Donations.
Donate appreciated stock directly to a nonprofit. You avoid capital gains and still get to deduct the fair market value. If you’re over 70½, you can also donate a portion of your retirement account directly to a nonprofit.
Itemized Deductions are Changing.
You may qualify this year. The state tax deduction cap increased from $10,000 to $40,000. Consider paying your 4th-quarter state estimate in December. Medical expenses over 7.5% of income, mortgage interest, and donations all count. The standard deduction increased to $15,750 (single) and $31,500 (married). And for Wisconsin residents: pay at least $2,500 in real estate taxes each year to qualify for the maximum school property tax credit of $300.
Business Expenses.
Most small businesses report on the cash basis. Pay as many expenses as possible by December 31 to take the deduction this year. And don’t forget to track your business miles throughout the year.
Other new items for this year:
- Tip income deduction – up to $12,500 per person (income limits apply)
- Overtime income deduction – up to $25,000 per person (income limits apply)
- Deduction for seniors over 65 – $6,000 per person (federal) if income is under the limit; Wisconsin allows a $24,000 deduction per person over age 67 with no income limit
This information is for discussion only. Many of these items have specific requirements that may affect your results. To learn more about your options, CONTACT us for a tax planning meeting to understand the full implications of these strategies.
Mary Guldan-Lindstrom, CPA