The last few months of a year can be a confusing time. On the one hand, everything is festive. We have Thanksgiving and the shopping festivals around it. We have Christmas and the New Year. And we have budgets and taxes to take care of too. We’re spending more than ever at the same time we’re trying to get our finances in order.
There’s no doubt that the sooner you take care of your taxes the better. That way, you can take steps to lower the total amount of taxes you pay and benefit from deductions. You can avoid having to pay certain taxes if your finances are currently tight. You can do it all without raising the ire of the IRS.
So, what steps can you take to get a headstart on your tax breaks? Here are some things you can try.
People working full time pay more on income tax than anywhere else in their financial lives. It far exceeds property taxes, for example. In most cases, the total amount of income tax you can defer depends on how much you contribute to a 401(k). Your 401(k) is only taxed when you withdraw it at retirement age.
But what if you want to lower the amount of tax you pay for this year due to your specific financial circumstances? You may be able to defer it to next year.
Most part- or full-time employees of a company can’t defer their income, as it gets paid on a fixed monthly basis. However, you may be able to defer a bonus if you ask your boss.
That said, income deferral mainly applies to people who are self-employed or earning passive income. By only billing at the end of December, you can ensure that your invoices get paid in 2023 instead of 2022.
Income deferral can not only lower the amount you pay taxes on, but can lower your tax bracket as well. Remember that this has the ability to push you into a higher tax bracket next year. The calculations depend entirely on your current and expected income.
Next year’s deductions
Deductions can significantly impact the amount of taxes you pay. Deductions can include things like charitable donations, health expenses, and tax bills. By deducting these from your taxable income, you pay tax on a lower amount while potentially lowering your tax bracket.
In the same way that you can defer some of this year’s income to next year, you can accelerate deductions from next year to this year. In other words, if you plan on donating to charity in early 2023, donate today instead. If you have to see the doctor for a checkup or blood tests, don’t put it off.
Again, whether this helps or hinders you depends on your personal circumstances. By deferring income and accelerating your deductions, you may leave yourself a much larger tax bill to pay for 2023.
Are some of your investments losing money? If so, you can take advantage of their poor performance to offset taxes you pay on investment gains. You can do this by selling your loser investments before the end of the year. Every dollar in losses offsets the taxes on a dollar in gains.
If you still have hope that your loser investments will reap benefits over time, you can eventually reinvest the funds. Of course, timing is everything in this scenario, as selling losing investments at the wrong time could lead to your losses becoming permanent.
If your investments have suffered significant losses there is a bright side. Loses that exceed $3,000 can be carried over to the next year to offset further gains. You can then carry over losses every single year.
Increase your IRA contributions
Your individual retirement annuity (IRA) is your most significant tax deferral. With most IRAs, you only pay taxes when you withdraw the funds at retirement age. There are exceptions that you can personally choose, but most people go with regular 401(k)s or IRAs.
Increasing your IRA contributions lowers the amount of income you’re taxed on this year and potentially lowers your tax bracket. It also ensures that the funds in your IRA grow more significantly as more tax-deferred money is invested. You’ll pay taxes on the funds eventually, but they will have had compound growth by then.
Taxes are unavoidable but there are ways to lower what you pay. By getting ahead of your taxes now, you can ensure that you have your finances in order by the end of the year.
Business And Features Writer
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