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The amount of tax you pay depends on the income you earn which decides what tax bracket you fall under. But if you plan carefully and are smart about your income and investments you can always reduce your tax liability. There are certain deductions and credits that a person is eligible for, and you should plan for them from the beginning of tax year and always analyse your position when nearing the tax year end.<br>u00a0<br><br>
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The amount of tax you pay depends on the income you earn which decides what tax bracket you fall under. But if you plan carefully and are smart about your income and investments you can always reduce your tax liability. There are certain deductions and credits that a person is eligible for, and you should plan for them from the beginning of tax year and always analyse your position when nearing the tax year end.
Deferring your Year-End Bonuses • Defer your year-end bonuses into the next year’s return will help lower your income bracket. This will help in reducing your tax if you are in a lower tax bracket. But this needs to be done considering what is the income that is expected in the next tax year.
Loss Harvesting • Loss harvesting means selling some of your financial instruments to offset the gain. You need to only pay taxes on the net profit that you make during the tax year. Hence, it is important to analyse your investment positions towards the end of tax year. It’s important to check if you are applying the loss to long term or short term. This loss is not applicable to retirement accounts.
Have more Balance in the Retirement Accounts: • Retirement accounts are the most secured ones, and no taxes are applied on these accounts. This is the most popular way to lower you tax bill. Two IRA methods are: Company sponsored 401k plans, where the employer also matches your contribution up to a certain limit. It’s always recommended to contribute the full amount allowed annually. The other is Roth IRA, the contributions don’t lower the tax amount but the distributions when you retire are tax free.
Beware of ‘Kiddie Tax’ • Kiddie tax means certain income of child, whether dependent or not; will be taxed at parent’s marginal tax rate. It’s important to know keep Kiddie tax in mind when you are reporting interest and dividend for the child.
Don’t use your Flexible Spending Accounts in the Year-End period: • Flexible spending accounts are created by all companies for their employees. The funds kept in these accounts need to be used within the time of 1 year. However, you should make sure that you spend its balance before the end of tenure for at least year-end.
Charitable Contributions • If you itemize your tax return, charitable contributions are tax deductible and there is no restriction on the amount. However, if your income exceeds certain limit the benefits may phase out. If you fall under standard deduction, charitable contributions up to $300 can be claimed on your return.
Education Fund • If you intend to save money through education fund, on federal front there may be no deduction or benefit available. But some states do give deduction for qualified tuition plan or 529 plan. • the above ways in which you can reduce your year-end tax are the most authentic ones. Keeping the above strategies in mind you can reduce your tax burden and maximize your return.
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