5 Ideas on How to Reduce Your Taxable Income

          We work hard to earn the best income possible to support our families and retirement; however, the more we make, the more we pay in taxes which may be counter-productive to the hard work put forth to earn more.  As a result, many Americans are actively consulting with Certified Financial Planners for methods to reduce their taxable income.  We’ve compiled 5 of the most common methods to reduce your taxable income.

1.       Contribute to Retirement:

o   As previously mentioned, planning for retirement is one of the top motivating factors of working hard for a greater income.  There are several types of retirement accounts and each has different rules.  A 401(k), 403(b), 457 or Thrift Savings Plan have a 2015 contribution maximum of $18,000 with a catch-up contribution allowance of $6,000 for anyone who turns 50 in 2015. All of the aforementioned Retirement Accounts require establishment and funding by 12/31/2015.

o   The Self-Employment Pension has a different set of rules.  The maximum contribution for 2015 is $53,000 and the deadline for funding the account is 04/15/2016 plus any extensions you may have been approved for.  There is an additional formula to calculating your maximum contribution limit including items such as a percentage of your net profit.

o   Lastly of the Retirement Account types we will discuss are Traditional & Roth IRA accounts.  These accounts allow for funding of up to $5,500 for 2015 or $6,500 if you turn 50 during the 2015 tax year.  Funding of this account must be deposited by 04/15/2016 with no extension opportunity.

o   Please keep in mind some of these account have additional age and wage restrictions.

2.       HSA Contributions:

o   Contributions limits for a health savings account for tax year 2015 are as follows below.  Take note of the additional $1,000 contribution if you are age 55 or older.  The deadline to fund a health savings account for tax year 2015 will be April 15^th, 2016; the same as the tax deadline without extension.  It is also important to know that in order to open and fund a health savings account you must have a qualified high deductible health plan HSA policy with a minimum deductible of $1,300 single or $2,600 family and a maximum deductible of $6,450 single or $12,900 family.  The contribution limits and deductible minimums and maximums tend to skew upward a little each tax year.

3.       Donate to a charitable cause you are passionate about.

o   Charitable contributions, unlike HSA contributions, must be made by the end of the tax year you are writing the donation off for.  For donations you would like to reduce your income by for 2015, the donation must be made by 12/31/2015.  It is important to be familiar with the qualified organizations as per the IRS which can be reviewed in the link provided here.  Before deciding on the amount of your donation you will want to consult a tax professional or Certified Financial Planner to determine the maximum amount you are able to donate as qualified to reduce your taxable income based on the overall adjusted gross income you will report that year.  These guidelines can also be found here.

4.       Pay property tax early:

o    The years for which you deploy this strategy will be a matter to consider.  Ultimately, by use of this strategy there will be a year for which you are paying your property taxes twice.  If you have a property tax bill due in January and you itemize, paying it before December 31 will allow you to deduct the payment from your taxable income on your 2015 tax return. It is also important to consult your trusted financial planner with this strategy because prepaying your property taxes could trigger the AMT, or Alternative Minimum Tax.  There are multiple write-off that must be added back when calculating AMT liability. Again, consult your financial planner or tax professional to determine when this strategy may be a good option.

5.       Defer income:

o   This method may not be available to everyone, but for those who receive compensation such as a year-end bonus could ask that the additional income not be paid until after the first of the year.  This strategy may also work well for those who are self-employed.  Invoicing could be delayed until late in the month of December causing the receipt of payment to arrive after the first of the year.

             As you can see there are numerous ways to arrange your finances for a more favorable tax liability.  I’m sure you have also recognized the many times we’ve stressed the importance of consulting with a Certified Financial Planner.  This article is not meant to replace the need to speak with a professional who is well versed in the qualifications and restrictions available with each method.  You are encouraged to call A.W. Abel as a resource of information.  614-499-1201

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