How can I reduce my taxable income?
In the Basic Tax Strategy Introduction we talked about terminology, now lets address the different groups of tax strategies that can be used to help you keep as much of your money as possible. One key concept is the goal of reducing your taxable income, thereby reducing your total tax paid. (your taxable income) x (your tax rate) = (your tax you have to pay). If you can reduce either of the factors on the left side of the equation, you come out with a smaller answer on the right side of the equation. Here we begin to examine ideas to lower the first factor in the equation (taxable income).
11 Ways to Reduce Your Taxable Income:
(1) Look at charitable giving in the most tax-advantageous light. In
some cases you may be better off giving assets [not cash] that have
appreciated in value.
(2) If you cannot itemize every year, you
may be able to itemize deductions every other year if you carefully
plan ahead and try to 'bunch' or
group deductions into the odd numbered years and then take the standard
deduction in the even numbered years. If this is your plan, make
sure to plan all of your charitable giving in the odd numbered years.
Don't give anything to charity in the even numbered years. Give twice
as much in the odd years.
(3) If it is getting towards the end of the tax year and you are
going to realize or have already this year realized some capital gains,
now is the time to scour your
portfolio to hunt up any losers you might have in there. Go ahead and
bite the bullet and take your loss on
those by getting out of those losing positions before the end of the
tax year. You'll save money on
your capital gains tax because you get to algebraically sum these wins
and losses against each other.
If you sold one position for a ten-thousand dollar gain earlier in the
year and are able to sell a couple of other positions late in
the year maybe one had a three thousand dollar loss and the other at a
six thousand dollar loss, now you
are only going to have to pay capital gains tax on a thousand bucks
instead of on ten thousand bucks.
When you sell those losing positions make sure you do not buy them back
within 30 days of selling them.
Other-wise you will get hit with a special rule designed to keep people
from making the losing sale for
tax purposes and then just turning right around and buying back the
same position to try to make a winner out of it in the future. You need
to wait more than 30 days until you buy back your position.
(4) If you have a 401k deduction coming out of your paycheck at
work, make sure you maximize your
contribution there. Another good reason besides the tax reason is to
collect all company matching if it applies. There are other optional
work deductions that may fit your situation. They are often refered to
as flexible spending accounts or sometimes by other names. Probably
the most widely used is the medical flex spending account. There are
others too. When you later use these
monies to pay for medical costs
for example, you are paying medical costs with pre-tax dollars. You
never had to count that money in your 'taxable income' and get taxed on
it.
(5) Although some tax laws and rates change from time to time, for
today at least, the capital gains tax rate on long term capital gains
is lower than the tax rate on short
term capital gains. You should try, if possible to wait until the one
year mark has passed to turn a gain into a long term instead of a short
term. This won't always be a good idea, but if you are
approaching the one year mark of ownership you should almost always
just hold for the short time longer to get over the one year mark.
(6) If you are doing estate planning, there are a number of
strategies to try and reduce the size of
an estate if you are going to be leaving an estate large enough to be
taxed. One thing you can do is just
start giving away money each year to whomever you were planning to
leave it to anyway. You can give
up to thirteen grand per year to each person you want to leave money
to. You could use this method until your estate
is below the taxable size. Again, some tax rule details frequently
change. Among the things that
change all the time is the size of a taxable estate and the estate tax
rate to be used on it. So you've gotta take a look at this issue once
per year and see where you're at compared with whatever whim the
congress may have most recently enacted about estate taxes.
(7)Make sure to structure your business income and expenses such that any profit that can be realized after the first of the year happens then instead of before the end of this year. For example you may put off billing some of your clients until January instead of billing them towards the end of December.
(8)Consider putting off converting a tradional IRA to a Roth. Doing the conversion increases your AGI in the year you do it.
(9)If you are over 70.5 years old you are allowed to contribute up to $100,000 directly from your required IRA distribution to a charity and that amount will not be added to your income for the year. (But you can't count it again as a charitable deduction. That would be getting double benefit from your contribution).
(10)If you have earned income and don't have a employee retirement saving plan you can make your full IRA contribution. That's up to $6k.
(11)If you are self employed, consider making extra contribution to a self-employed retirement account. Each dollar you put in reduces your AGI a dollar for this year. In fact, as long as the account exists in time for this year, you can even put off funding the money into the account until you file your tax returns.
Now that we've taken a nice overview of the big picture, and we've looked at steps to reduce your taxable income, it's time to dig into some other specific deductions and strategies in the pages of tax-deduction-tips.com and check back next month for the next installment of tax planning strategies.
Go back to:
Basic Tax Reduction Strategies
Intro
