Taxes take a big bite out of the income we earn. We may pay: federal (IRS) income tax, state income tax, payroll tax (social security/medicare), sales tax, and property tax. Most of these taxes offer limited options to control how much we pay. However, our golden opportunity comes with income tax because there are a ways to reduce our expense. Today, I offer some of these for you to consider:
The Why & The How
If you want to want to make sure your money is more in “your pocket” than in theirs (The IRS), now is the time to act. Estimating your 2014 tax bill keeps you from being surprised next year. More importantly, it provides you the opportunity to perhaps decrease the amount of tax you pay by planning and acting strategically before the end of this year.
- Determine how much you have earned this year
- Determine what you have paid toward your 2014 tax bill
- Then increase each of these amounts to estimate the year-end amounts
Now that you have a glimpse of your 2014 tax situation, compare those numbers to those on your 2013 tax return. A filed return can be used as a sort of “road map” to see if there are options to reduce your tax bill now or in the future.
For example, did you get a refund last year? If so, consider this:
Kiplinger’s recently had a great article titled, “Safeguard your Refund by shrinking it”. The article includes the following:
- More than 75% of Americans get an IRS tax refund each year which is the equivalent of giving the IRS an interest free loan
- Identity Theft is on the rise and thieves file fraudulent returns to collect refunds. Avoid this risk by limiting the amount of refund you receive
- Use on –line tax calculators to see if your estimated tax withholding is correct; the IRS and Kiplinger’s both provide these
- File a revised W-4 with your employer this year to change your tax withholdings; remember the goal is to break even
Then consider if you can shift income to decrease the amount of tax owed:
If you think your income will decrease next year and your tax rate would be lower, can you:
- Defer a year-end bonus to January 2015?
- Postpone a sale that will trigger a gain to next year?
- Delay exercising stock options?
Alternatively, it may make sense to move income to this year:
- Covert a traditional IRA into a Roth IRA and recognize the conversion income this year
- Take IRA distributions this year?
If you itemize, would you benefit if you changed the timing of some of your payments?
If you expect your income to decrease next year, then you might want to move some payments/deductions to the current year to offset your higher income this year. Can you:
- Prepay property taxes?
- Make your January mortgage payment this year?
- If you owe state income taxes, consider making up any shortfall rather than waiting until your return is due
- Consider the timing of medical expenses so you can benefit from the deduction?
- Sell some or all of your loss stocks?
- If you qualify for a health savings account, consider setting one up and making the maximum contribution allowable
Defer Deductions into 2015
If you expect tax rates to increase next year, or if you anticipate a substantial increase in taxable income, you may want to explore waiting to take deductions until 2015:
- Postpone year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments
- Postpone the sale of any loss-generating property
Can you do anything else?
For those that would like to take it a step further, consider if there is anything you can do to increase your “Above the Line Deductions”.
On a Federal Individual1040 tax form, the basic formula is:
Income minus “Above the Line” deductions = Adjusted Gross Income.
These deductions include paying monies to:
- Establish an IRA for you or your spouse?
- If qualified, set up a Health Savings Account?
- If self-employed, would you benefit from having health insurance or a Qualified Pension Plan?
While this is not an exhaustive list, I hope it gives you enough information to initiate your plan, act this year, and save money on your next tax bill.
A dollar saved is a dollar you don’t need to earn. Keep marching towards financial freedom. Happy planning!
Deb Fox is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointment. More information is available at www.debfoxfinancial.com. Questions or comments can be sent to firstname.lastname@example.org. Thanks for reading