If you work, you need to pay taxes. You know that and I know that. There is no way to get around it, and when tax season comes around—they find you.
They have been taking money out from the beginning of the year from each paycheck, and what you get taken out, and what you are given is different from the guy next door. All situations are different, and tax planning from the very beginning is important to ensure you have everything you need in order.
There are two different approaches to tax planning:
• Reducing Taxable Income
• Deferring payment of taxes to the extent possible
Reducing Taxable Income
There are many different ways to reduce your taxable income. Speak with a CPA to ensure you know all your legal options.
1. Top Off Your Retirement Savings Plan: Money contributed to an employer-sponsored retirement plan (such as a 401(k)) is not taxable. In 2016, you can contribute up to $18,000 or $24,000 if you are 50 or older without being taxed.
2. Depending on your income, you can deduct contributions to an IRA, up to $5,500 in 2016. Roth IRAs do not offer this upfront tax break because withdrawals are tax-free when you retire.
3. Give to Charity: If you itemize your charitable contributions, your taxable income will be reduced. You’ll need proof. Keep record of your contributions, checks, or credit card statements as proof. If you contribute $250 or more, you will need acknowledgement from the charity. Donations made via credit card are deductible for that year, even if the credit card payment is made in January of the next.
4. Pay your property tax bill early: If you have property tax bill due in January, pay it before December 31. This will allow you to deduct the payment from your taxable income on your 2016 tax return. Keep in mind, prepaying your property taxes could trigger alternative minimum tax. Work with a CPA to ensure you don’t run into this and many other problems.
5. Sell your losers: If you’re not making money off of something. Get rid of it. This doesn’t just mean dwindling stock shares. Work to offset capital-gains income with your CPA. If your loss exceeds your gains, you can deduct up to $3,000 from your other taxable income. Losses that exceed this amount can be applied towards future years.
6. Delay the Sale of Investment Winners: Sell high! You have heard that before. You may want to make a profit right away, but hold onto it for some added balances. Waiting until January 1st means you will not have to report the gains as a part of last year’s income.
7. Defer Income: One type of income you can defer is the year-end bonus. Ask your employer to pay it the next year. This way, it won’t impact the current year’s taxable income. If you are self-employed, send bills to clients late in December.
There are so many more ways to reduce your taxable income. Your situation is different from everyone else’s, and working with an experienced CPA will help you decide what direction is best for you.