It’s tax time again.
No the filing deadline hasn’t changed, but tax planning done now could save thousands come spring of next year.
8 Steps to Reduce Your Tax Bill
Running through these 8 steps can uncover tax saving opportunities that otherwise would be missed after the end of the year.
- Add the expected amount of earnings to be paid through the end of the year to what you have already received to get projected gross income. Subtract the pre-tax payroll deductions such as health insurance and 401k to get to the amount of income that will be reported on your tax return.
- Use your latest brokerage statement to determine what dividends and capital gains will need to be reported. Many mutual fund companies provide estimates of income distributions that they plan on making prior to the end of the year.
- Look at your investments to determine if taking some losses will be a good strategy before the end of the year.
- Other sources of income such as IRA distributions and Social Security benefits need to be considered as well. Special attention needs to be given to the amount of Social Security that will be included in taxable income. If you are inside of the Social Security tax bubble then looking to reduce or eliminate other income sources between now and the end of the year can have a large impact on your ultimate tax bill.
- Make sure to take advantage of opportunities for deductions against adjusted gross income (AGI). Fund your health savings accounts if you are eligible. We often recommend making a Roth IRA contribution instead of a tax deductible IRA contribution, but we consider many factors before making a final recommendation.
- Go through your potential itemized deductions. Look at the prior year return for some guidance. If you made a 2014 estimated payment to the state in January of this year and/or owed when you filed your 2014 state tax return then you can add those payments as a federal tax deduction on this year’s return.
- Then run a quick calculation to see where your taxable income falls. If you are in a lower bracket (15% or below) you may want to delay deductions and accelerate income. If you are above the 15% bracket then you might look to do the opposite.
- Finally make sure you know how much you have paid in through tax withholding and quarterly estimates. You may want to adjust your withholdings by filing an updated W4 with your HR department or adjust the amount (and timing for a state estimate) of your final quarterly estimate.
Running an early projection of your tax return can add a tremendous amount of value by giving you enough time to make some key adjustments.
If you get in the habit of doing this every year it can mean significant tax savings over the long run. Your particular situation may take deeper analysis. If you have questions, contact a CFP® Professional to help you through the decision-making.
Copyright: kurhan / 123RF Stock Photo
