Year-End Tax Planning Begins Now
With the holiday season looming, it’s not too soon to start your year-end tax planning. One of the consequences of achieving financial success is that what was once a relatively straightforward tax return increasingly becomes more involved as more tax issues come into the picture. You may have more deadlines to track, forms to file, and you may also experience bracket creep which can suddenly change the way you manage your taxes and finances.
Waiting until the traditional tax filing season to deal with these issues could be hazardous to your wealth. As your finances improve, it is important to become more knowledgeable about your taxes to avoid any surprises or to consult a tax preparation expert.
The tax code is loaded with many tiny provisions that can impact the financial lives of most Americans. Having some understanding of some of the intricacies of the taxation process can save a lot of time and money.
Here are tax planning steps you can take right now to help keep you ahead of the game:
Beware of Bracket Creep
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. Not to mention your state’s tax brackets (if your state has an income tax) can creep even faster.
Manage to Your AGI
Your tax bracket is determined by your adjusted gross income (AGI) which is a function of all 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 aren’t likely to pay any more in taxes.
For example, if your AGI last year was $80,000, and this year you earned an extra $5,000 of income, you can keep your AGI in place by making a $5,000 contribution to your qualified retirement plan if you are eligible.
Hire Your Kids for the Holidays
If you own a business, you can keep your income in the family and still reduce your tax bite by hiring your children during the school breaks for 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 probably won’t create significant tax consequences for your children.
Accelerate Business Expenses
Accelerating your business expenses can have the same effect as accelerating your personal deductible expenses. By pre-paying invoices, or, if you run your business on a cash-basis, delay receipts into January, you may be able to 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 likely determine which moves to make and how much you might need to move around in order to minimize your current year tax bite.
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