6 Recommendations for Dropping Into a Lower Tax Bracket This Year
The tax bracket is pretty important when it comes time to pay your federal taxes. These brackets determine how much income tax you pay on your highest tier of income. Therefore, the name of the game is trying to reduce your tax bill by reading the fine print, taking advantage of deductions, and learning more about filing statuses. If you’re able to drop into a lower bracket, you’ll not only pay less in taxes, you’ll also reduce your tax rate for part of your income.
Remember, tax brackets are marginal rather than absolute, meaning that only part of your income within the range is taxed at the 10%, 15%, 20%, etc. brackets you see on the taxation table. If you want to drop into a lower bracket, you need to make your income “off-limits” for taxation purposes.
if you need help with your taxes, long gone are the days to spend a fortune in an accountant. You can sign up to an app to make your life easier at a more affordable price.
Tax Bracket Recommendations
Here are 6 recommendations for protecting that income from the tax filing process:
1. Retirement Accounts
Contributions to retirement accounts like 401Ks come out of the pre-tax income, automatically lowering your taxable income while storing away your hard earned money for retirement. If your work doesn’t have a 401K, set up an IRA account with any bank or brokerage firm.
2. Healthcare Accounts
If your insurance plan is high deductible, you could qualify to open an HSA. Any contributions made to the account are therefore deductible, lowering your total tax bill.
Certain types of interest on debt are deductible today, including mortgage interest, student loan interest, interest on debt to purchase investments, and business debt interest. However, you can only claim interest deductions if you itemize as opposed to taking the standard deduction.
4. Other Taxes
Yes, the state and local taxes that you owe qualify as itemized deductions on your federal tax bill. Most times, though, you can deduct either state income tax or sales income tax, but not both.
Charitable contributions of up to 50% of your adjusted gross income are also deductible. These contributions must be given to qualified charities. Both cash and property donations can be deducted at this point – plus, you’ll be doing a good thing while you’re lowering your taxable income.
6. Manage Assets
If you’re thinking about selling off a lot of stock this year, think again if that monetary gain will push you up a bracket. Instead, budget out your time for selling off stock, selling some one year and some the next. Additionally, if you’ve hung onto capital asset for more than one year, you could qualify for long-term capital gains rates, which are even lower than normal rates today.
Master The Art of your Tax Bracket
If you look at the configuration of your taxable income and subsequent federal tax bracket as a puzzle, you’ll realize that tax time doesn’t have to be so miserable each year.
Once you have your tax bracket levels provided to you, which means you have plenty of time to figure out how to protect part of your income. Or simply make your life easier signing up to a tax app to help with paying less taxes this year.