Are you worried about your tax bill but don't know what to do about it? Strategic tax planning isn't just something for high earners or the inherently rich. It's also something that middle income families can put into practice to lower their tax costs. So, what strategies can you do in your own situation? Here are 5 tips to help lower taxes both now and in the future.
Use Tax-Advantaged Accounts. This is an obvious first step, but it's one that not enough taxpayers take advantage of. By contributing the maximum amount to your employer's 401k, you can reduce your taxable income and receive the most amount of company matching funds possible. In addition, many middle-income earners can also contribute to an HSA (Health Savings Account), IRA (Individual Retirement Account) and/or a Roth IRA. Traditional IRAs help reduce your taxable income now, and Roth IRAs create tax-free income during retirement.
Know Your Tax Brackets. The United States tax system is progressive -- meaning that you pay more taxes as your income increases. By knowing when your income level will trigger a higher percentage of taxes, you can stay under these limits. You should also know the earnings limitations on any tax credits or deductions you receive. For example, by knowing that there is a higher investment tax (the Net Investment Income Tax) for filers who are married and earn more than $250,000, you can avoid paying this extra tax by keeping your taxable income under this threshold.
Max Out Deductions. Itemizing your deductions instead of taking the standard deduction is a great way to reduce your taxable income. However, many filers don't accumulate enough deductions to itemize each year. Avoid this problem by making strategic purchases and donations. For example, if you don't always have enough medical expenses to use them as a deduction (the minimum amount of medical deductions is 10% of your income), combine any voluntary medical expenses into one year instead of two. You can often do the same with charitable deductions and unreimbursed employee expenses.
Look for Tax-Free Investments. Most investment income is fully taxable, but there are some on which you don't have to pay taxes. One of the easiest nontaxable investments is municipal bonds. Many such bonds are not taxed at the state level, at the federal tax level or both. You can also sell underperforming stocks before the year ends to claim the losses against your normal taxable income.
Gift Assets. Rather than giving money to family members or children, try gifting assets -- especially income-producing assets -- instead. For example, if you give stocks or bonds as a gift to your elderly parent or young adult child, this gift is nontaxable to you and can reduce your future income. And since many people who receive family financial help are in a low tax bracket, the money will be taxed less than it would as your own income. Be sure to keep your gift under the annual tax exclusion amount ($14,000 for 2016).Share