No one likes writing that check to Uncle Sam each spring. But it’s a fact of life for almost everyone, so it’s important to find ways to reduce your tax burden as much as possible. The following combination of tax strategies could be considered a “triple threat” to the IRS, and it could save you considerable cash when your tax bill is due in April.
Defer income, when possible. Ask your boss to cut a check for your year-end bonus at the beginning of January, rather than December, so that taxes on the money won’t be due until the next spring. Why? If you’ve been paying taxes through automatic payroll deductions all year, those payments are figured on your expected annual income. A bonus at the end of the year could throw you into a new tax bracket and cause you to owe money to the IRS.
If you’re self employed, wait until January to send out the last few invoices of the year.
Make the most of deductions. If you earn more than usual in a particular year, cluster your deductions to make the most of them. Prepay the next year’s real estate taxes, increase charitable donations, and find ways to manage your medical expenses to your best benefit. Talk to your tax professional about all of the deductions for which you’re eligible, and get advice on how to best utilize them.
Protect your income from taxes. Since taxes on retirement plan contributions are deferred, contribute the maximum amount each year. Once you’re eligible to make catch-up contributions at age 50, take advantage of the additional tax-deferred savings opportunity. You might as well save yourself more – and pay Uncle Sam less.
As always, consult with your tax professional before making any big decisions about your income or tax strategies.
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