A big part of our job is to ensure that you keep as much of your hard-earned money as you can.
One of the ways we do this is by helping you with tax saving strategies designed to maximize deductions and legally avoid or defer your tax liabilities.
If you are concerned about the amount of tax you or your business is going to pay, then here are a few pointers on why you should contact us for an in-depth discussion on a range of tax saving opportunities.
The IRS runs on documentation.
Any time you wish to claim a deduction or prove your income, you’ll have to provide documentary proof in a format that the IRS demand.
It is vitally important that you keep a proper record of all transactions that will have a bearing on your tax returns. Whether it’s a receipt for business expenses or travel and entertainment costs, the IRS will want a full accounting of what it is, why you spent it and when.
Likewise, any income that you receive or non-taxable amounts needs proper documentation so that it can be correctly allocated when declaring it on your tax return.
Either Defer Your Income or Avoid Its Recognition
Deferring tax is not only legally allowed, but it also makes a lot of sense.
When you retire, the chances are that you will be receiving a lower income than when you were working. That means you’ll pay less tax on retirement.
So, it makes sense to defer your tax payments to a time when you are legally paying less tax.
By using tax-deferred retirement accounts, you not only lock in high capital growth, but you defer the tax you’ll pay on your current earnings. You get the opportunity to enjoy a healthy return on your investment income on which you’d have had to pay tax if it were not in the retirement investment plan.
You can also take advantage of state tax estimates and defer the full liability until the following year.
Contribute to 401K and 403 (b) Retirement Plans
By paying the maximum you can afford on a 401K plan, you’ll enjoy tax advantages by deferring the tax on your current income until many years into the future.
Employers are also able to contribute a matching amount to your retirement plan without you being taxed at your current rates. This effectively gives you the use of tax-free money.
As a business owner, you can set up a retirement plan for yourself, even when the business is only a small contributor to your main source of income. It’s a great way for small business owners to avoid paying tax on their current earnings while building up a sizable retirement nest-egg.
Avoid Receiving Bonuses Before the Year-End
Any bonuses that may be due to you can be delayed so that you only receive the funds in January.
This effectively gives you an additional year before you are liable to pay tax on the amount received. You can do the same with your invoicing, if your cashflow can sustain it.
If you are self-employed, instead of billing your customers at the end of December, date the invoice in January and enjoy a tax-holiday on that income for another year. Not only can this defer your tax payments, but it can also reduce your tax due in the current year by keeping you in a lower tax bracket.
Offset Capital Gains Against Capital Losses
Your capital gains can be offset against any investments on which you have accrued a capital loss.
Your losses are deductible up to the amount of your gains plus an additional $3,000. And if you have an investment that you want to sell, it may be better to wait until after the end of the year and thereby defer any tax due on the capital gain for another year.
The long-term capital gains tax maxes out at 20%. It makes sense to consider the length of time you plan to hold an investment to achieve the best financial outcome.
Give a Gift and Pay Less Tax
Your gifts don’t only have to benefit the recipient.
You can give away up to $16,000 per person per year without having to cough up federal gift tax. If your husband or wife decide to join you, they can add an additional $16,000 for a total of $32,000 tax -free donations per year.
The benefit of this is that you can do this for any number of donees. There’s no limit in how much you can give away. The only proviso is that the recipient will have to pay tax at their (mostly) lower income tax rate.
While donations to minor children (under 18 years) are subject to special rules, it’s still worthwhile investigating the opportunities for tax savings using this route.
And any medical or educational costs that you pay directly are excluded from the donation’s calculation.
Top Up Your Tax-Free Investments
Whether it’s treasury bills, bonds, or notes that interest you, investing in these tax-free financial vehicles will maximize your returns without impacting your tax bill at the end of the year. There are a few rules regarding maturity dates that you need to be aware of, but these are easily taken care of.
You can also receive tax-free income from municipal bonds. While they do pay lower rates of interest, individuals who are in the higher tax brackets can benefit from their tax-free status. After accounting for their higher tax rates, the lower returns may still be more than what they’d receive if they were taxed on higher earning investments that are fully taxed.
Being Charitable Helps Too
If you make charitable gifts, then structuring them so that you aren’t hit with a tax bill makes a lot of sense. You also get the benefit of a tax deduction for the fair-market-value of your donation.
Likewise, if you travel for charitable reasons, you can claim it against your taxable income, so long as you’ve kept detailed records.
For a detailed assessment of your financial affairs and to receive our recommendations on how you can take advantage of tax saving strategies, visit Duran Business Group for a confidential discussion.