THE TAX vs. EARNINGS DICHOTOMY
Most everyone wants to pay the least amount of taxes potentially, but wants to make the most amount of money possible! That goes for you, your family & friends, Warren Buffet, and President Trump! But how do you do that?
One way is to earn less than $6300 if you are single, or $12,600 if married (but you had better live with your parents if you only earn that amount)! Since earning that small amount of money, and surviving, is not possible for a large majority of Americans, what rational steps can you take?
I will never be able to cover everything here, nor do I know everything, but I will list a number of areas. Many need to be worked on throughout the year, not just in December, and January may be too late for most. Each would take a large amount of explaining, and I am not writing a book! As the year goes on, I will try to touch base on each of these areas. In the meantime, do an online search of each topic, or contact me for more information or for a professional who can help you and set you up.
1. Watch your tax brackets.
How much more can you earn until you get into a higher tax bracket? Sometimes doing some of the following list of tax saving ideas can keep you there. Or maybe you are in the range where you can never get down to the lower bracket, or the higher bracket is not attainable this year. Either way, you should know and be aware. To see where you fall, click on this link: https://taxfoundation.org/2017-tax-brackets
2. Take advantage of Retirement Plans.
All retirement funds help tax-wise: some now, some later. Contribute the largest legal amount or as much as you possibly can. Depending on your work situation, you can use a 401K, Solo-401K, IRA, Simple IRA, SEP IRA, or maybe your company has its own retirement benefits plan. And do not forget the Roth IRA either. For more information go to: https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans-1
3. Use an HSA-Health Savings Account.
If your company contributes to your "high deductible" HSA, you know it is great. If your company does not have an HSA benefit, do your own. It is tax deductible up to $6750 for the family, or $3400 for an individual. If you are over 55 years of age, you may add an additional $1000 on top. There are rules on your deductible and total annual out of pocket expenses, so read up on it, but most people fall under those limits (but not all). Find out the basics here: https://thefinancebuff.com/hsa-contribution-limits.html
4. Tax Exempt Interest.
If you have a fair amount of interest income, talk to your financial advisor about the benefits of putting money into tax-exempt interest vehicles. If you are paying 25% tax on bank or corporation interest earnings, will the net amount of interest be equivalent to a lower yielding tax-exempt situation? Here is a quick explanation: http://www.investinganswers.com/financial-dictionary/tax-center/tax-exempt-interest-4963
5. 529 College Plan.
If you have children who plan on attending college, and s/he is not part of the less than 1% who receives full-ride scholarships (but you can transfer it to another sibling if s/he is!), then a 529 Plan will save tax dollars AND help offset the astronomical price of college. Granted the tax benefit is much better on your state return, but it is still tax savings for something you will be paying for anyway. Here is a very brief overview: http://www.savingforcollege.com/529_plan_details/index.php?page=plan_details&plan_id=41
6. Paying Schedule A deductions in December AND tracking them.
Schedule A deductions are a godsend to the majority of American taxpayers. It is often the best means of reducing taxes along with the above suggestions. By paying these expenses in December, rather than January of next year, you could potentially save yourself taxes. First, know that if you do not have a combined deduction amount of $6350 for single or $12,700 for joint filers, this will not help. If you do have over this amount, then increasing it will help with each dollar until your income exceeds $261,500, where a phase-out begins. There are a multitude of items on Schedule A, but also a multitude of rules involved. With that warning being given, the main areas that potentially may help would be: Medical expenses over 10% of your AGI; Real Estate/Property Tax paid in December for the next year; Estimated tax payments for your state and also city that are sent in December rather than January; Mortgage payment received by the lender in December that is technically due in January; Donations to a charity of money or put on a credit card even though it is not payable to the credit card company until the next year; Donating those left over clothes or appliances to a certified 501(c)(3); or unreimbursed employee expenses. Find out more at: https://www.irs.gov/pub/irs-pdf/i1040sca.pdf
7. Capital Loss Carryover and a New Tax Preparer.
If you have a capital loss that was not used in the past, AND you are switching tax preparers, make sure the new preparer is aware of those losses. If not used, it will be lost forever and you will be paying more taxes in subsequent years. This can be accomplished by either telling the new preparer, or by giving him a professionally completed return from the prior year(s). There is often much more information in those prior years that a professional may noticed that can help with taxes, or on the flip side, keep you out of the IRS crosshairs.
8. Long Term Capital Losses with Short Term Capital Gains.
If you have long term capital losses that are carrying forward, consider selling some assets that will have a short term capital gain. Short term gains are taxed at a higher rate, so use the long term losses to offset the tax, but talk to your tax advisor to make sure your long-range plans are being met. Here is a brief synopsis: http://www.bankrate.com/taxes/capital-losses-can-help-cut-your-tax-bill/
9. Qualified Dividend Payments.
If you receive ordinary dividend income from an investment, talk to your financial advisor about switching to an investment with QUALIFIED dividends. As the name implies, ordinary dividends will be taxes at your normal tax rate. Qualified dividends are taxes at a lower rate from 0% to 20%. If you are normally in the 15% tax bracket, you can typically figure that your qualified dividend will be at 0%. If you are in the 39.6% bracket, a 20% tax looks good! For a brief discussion: https://www.fool.com/knowledge-center/qualified-dividends-vs-ordinary-dividends.aspx
10. The 2016 Unreimbursed Employee Business Expense.
If you spend your own money on your job, be it meals or traveling, AND you are not reimbursed by your employer, you probably claim, or should claim, the deduction on the Form 2106. Though definitely a benefit, it comes with a tax hurdle: you can only claim the amount that is over 2% of your AGI (adjusted gross income). So, for example, if your AGI is $50,000 you can only claim the amount OVER $1000. To help you get ALL your personal money back, talk to your company about being reimbursed for all your business expense. You will not have any out of pocket expense, and the company can deduct the whole amount. The company, like the IRS, will want receipts or proof about each transaction, but you should be doing that already to claim it on your 2106 tax form. Read this for a quick overview: https://www.thebalance.com/unreimbursed-employee-business-expenses-3192841
11. Adjust your W-4.
This is not really a tax SAVINGS, but rather a way to reduce the amount of tax to be paid in April of each year. If you constantly owe the IRS or your state, fill out a new W-4 and give it to your employer or HR department. If you owe every year, REDUCE the number of allowances you are claiming, or add an "additional amount" on line 6 of the W-4. Or maybe do both. This will give you less take-home money, but will increase the amount you have to pay the IRS at year-end. On the flip side, if you have a large refund each year, consider INCREASING the number of allowances you are claiming so the IRS does not keep your hard-earned money for the whole year.
12. Pay Estimated Tax Payments.
Again, not a tax savings, but if you typically need all of your paycheck most weeks, then consider sending in Estimated Tax Payments four times a year in April, June, September, and next January to reduce the tax bill. Even sending in a couple of payments to help decrease your tax burden next April, though not what the IRS really wants, it will still accomplish some of what your goal is.
This is an overview of tax-saving strategies. The tax law is complex and not always clear. Do your homework first on each of these subjects so you are informed. Contact me by phone, text, or email if you have questions. If you do not have a financial advisor, ask me. If your current financial advisor has not talked about some of these, ask him or her, or contact me for a referral. I can give you trustworthy recommendations whom I respect and know will do the best they can for you.