Tax Shifting Ideas to Reduce Your Bill to Uncle Sam
Is there a taxable income reduction idea you can use?
Numerous tax specialists discuss the idea of transferring your tax burden from one year to another. Although this concept seems logical in theory, how can you effectively implement it in practice? The concept? Due to the complexity of the tax code, there are frequently chances to lower your tax liability by managing your taxable income. This is because:
Income tax rates vary from 0% to 37% depending on your income and filing status.
Many tax breaks have income limits.
Tax breaks have income phase-out ranges.
Incremental taxes like the alternative minimum tax are triggered by income level.
So if you can shift your income and expenses from one year to the next, you could create a net tax obligation for both years that might be lower than if you did nothing. Here are six great ideas to accomplish this.
Idea 1 - Know the rules
Determine if you are suitable for utilizing shifting as a tax planning strategy. For individuals, the income tax rate rises by 80% or more on earnings exceeding $47,150. For married couples, this increase happens when the adjusted gross income surpasses $94,300. However, various tax advantages are lost at different income thresholds.
Typical tax breaks affected by income limits include child tax credits, earned income credits, educational credits, premium health care credits, and numerous educational tax benefits.
Idea 2 - Load up your contributions
If you itemize deductions, think about consolidating your cash and non-cash contributions into the year that reduces higher-taxed income. For instance, you might move next year’s church donations to this year. This strategy of grouping itemized deductions into a single year is even more beneficial with the increased standard deductions introduced in 2018.
Idea 3 - Leverage the cash basis concept
You can claim a deduction when you make the payment. A credit card receipt is valid on the date the transaction is processed, not when you settle your monthly bill with the credit card company. With this in mind, you could adjust the timing of a property tax payment or a mortgage payment slightly earlier or later to determine whether the deduction falls in this year or the next.
Idea 4 - Stop working
This technique often serves as a crucial tool for shifting taxes in numerous situations. A typical example involves individuals below the full retirement age who are collecting Social Security benefits. If this is your situation, it's important to manage your part-time work carefully; otherwise, you might have to pay taxes on some of your Social Security benefits or even lose a portion of them.
Additionally, work can negatively impact your tax situation if a dependent's income pushes you above the earnings limit for the Health Insurance Premium Tax Credit. In such cases, it might be wise to either stop working or arrange for your final paycheck to be deferred to the following year.
Idea 5 - Manage retirement plan distributions
Individuals over the age of 59½ can utilize distributions from pre-tax retirement plans to effectively manage their taxable income. When calculating withdrawals, it's important to assess how to optimize the tax efficiency of your income. An analysis might suggest that withdrawing slightly more this year could result in these retirement earnings being taxed at a lower rate compared to waiting until the following year.
Idea 6 - Manage your stock and investment sales
You can utilize up to $3,000 in investment losses to offset your higher-taxed ordinary income. Leverage this opportunity when choosing whether to realize a stock loss this year or next. By doing so strategically, you can offset your stock loss against ordinary income, which is taxed at a higher rate.
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By shifting your taxable income to the right level, you can often reduce your tax bill. Please call 808-468-8041 and speak to our Tax Consultant Experts if you wish to have a review of your situation.
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Reduce Your Bill with Tax Shifting Ideas from Diamond Head Tax Group
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