It’s May. Your tax return has been filed. So what’s next? If you’re hoping to pay less tax in the future, your best move may be to go back to the drawing board. Using your last year’s return and what you tell us about your current financial picture as a guide, we can help you identify potential tax-reducing strategies for this year and beyond. Here are a few ideas to get you started.
Save for Retirement
Making pretax contributions to a 401(k) or 403(b) plan sponsored by your employer reduces the amount of your taxable wages — and the amount of income tax withheld from your paycheck. Your deferrals, along with earnings from investing the deferrals, are not taxable until the money is distributed to you.
As a 401(k), 403(b), or 457 plan participant, you may also have an opportunity to make after-tax “Roth” contributions. Making Roth contributions won’t save you taxes upfront. The advantage comes later, after a five-year period passes, beginning with the year you made your first Roth contribution. At that point, any Roth money distributed from the plan is tax-free, provided you are at least age 59½ or the distribution is made on account of your disability or death. So, qualifying earnings on your Roth contributions are never taxed.
Think Capital Gains and Dividends
Turning to non-retirement account investments, two types of earnings receive favorable tax treatment: long-term capital gains and qualifying dividends. Right now, the tax rate on both is capped at 20% (15% or 0% for those in a tax bracket below 39.6%). Because your regular tax bracket could be as high as 39.6%, there may be a substantial tax incentive to earn capital gains and dividends instead of fully taxed short-term gains and interest income. Of course, tax considerations are only one factor to consider in managing your investments.
Find Above-the-Line Deductions
On the expense side of the equation, certain expenses often referred to as “above-the-line” expenses, are deductible in arriving at your adjusted gross income rather than as itemized deductions. Some examples include:
- alimony paid
- student loan interest
- moving expenses
- self-employed health insurance
Limits apply. An above-the-line deduction not only lowers your taxable income, it can help you qualify for various other tax breaks.
A review of your tax situation this year may reveal additional opportunities to save taxes. When you’re ready to think taxes, think of us. We’ll be glad to help. At Jackson and Associates CPA, PA, we are Largo, FL Certified Public Accountants who build a strong relationship with our clients by working year-round to help them prepare for tax season. We constantly watch for changes to the tax regulations and develop new techniques to limit tax liabilities for both individuals and small businesses. Call us today at 727-544-1120 or request a free consultation online.