Taxes? During the Holidays? Keep These Tips in Mind.Submitted by Reby Advisors | Certified Financial Planners | Danbury, CT on December 1st, 2016
With the holiday season in full swing, it's easy to overlook year-end financial planning items. If you haven't already, now is the time to take action and reduce your 2016 income taxes!
Waiting until tax filing time to deal with these issues could be hazardous to your wealth. Here are some tax planning steps you can take right now to keep you ahead of the game:
Beware of Bracket Creep
All income is not taxed equally. Everyone starts the year off at the lowest tax rate – 10%, but as you continue to receive income, it begins to spill over into higher brackets – 15%, 25% and ultimately 28%. If your maximum tax bracket has been 25%, it’s important to know if an earnings increase pushes you to the next bracket, because not only will you be paying more taxes on the additional earnings, you will be paying it at a higher rate. And, don’t forget your state’s tax brackets (if your state has an income tax). They can creep even faster.
Some of the tips below may help you avoid this bracket creep.
Manage to Your AGI
Your tax bracket is determined by your adjusted gross income (AGI) which is a function of all of your income, including earnings, interest and capital gains, less deductions. You can increase your earnings from one year to the next, but if you can keep your AGI from changing, you won’t pay any more in taxes.
For example, if your AGI last year was $80,000, and this year you earned an extra $5000 of income, you can keep your AGI in place by making an $5000 contribution to our qualified retirement plan if you are eligible.
Hire Your Kids for the Holidays
If you're a business owner, you can keep your income in the family and still reduce your tax bite by hiring your children during the school breaks of the holidays. Any income paid to children is a deductible business expense, and, in most cases, the amount of income you might pay during that time frame won’t create significant tax consequences for your children.
Accelerate Deductible Expenditures
Another way to manage your AGI is to move up the payments of any deductible expenses so they occur this year instead of next. For example, you could make your January mortgage payment on December 31 of this year and claim it as a current year deduction. Accelerated deductible expenses could include your homeowners fees, property taxes, car registration, and, of course, any charitable donations you planned to make next year.
And, don’t forget any work-related expenses, such as subscriptions, trade dues, legal fees, career education, licenses, all of which can be paid in advance for a current year deduction.
Accelerate Business Expenses
Accelerating your business expenses can have the same effect as accelerating your personal deductible expenses. By pre-paying invoices, or, if run your business on a cash-basis, delay receipts into January, you can reduce your business income enough to keep your AGI down.
Buy Your Tax Preparation Software Early
If you are trying to manage your year-end tax planning, it would be a great idea to purchase your tax preparation software now instead of waiting until tax season. This would enable you to input your numbers (based on estimation) now and begin modeling your tax moves between now and the end of the year. This way you can more accurately determine which moves to make and how much you might need to move around in order to minimize your current year tax bite.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel.