(Image source: mppl.org)
Along with the excitement of the Christmas season, November and December usher in year-end tax planning. If you own your own business, the need to meet with your tax preparer cannot be stressed enough. There are many options and decisions to make regarding the timing of income and expenses – too much for a month of Money Monday posts! Today’s post is aimed mostly toward employees, although there are a few things business owners can do as well.
Even if your income tax return is a simple as a 1040A, you may be able to manipulate your tax bill by timing your income. Are you receiving a year end bonus? Depending upon where you work, you may be able to postpone the bonus into next year if you’re about to jump into the next tax bracket. To explain, let’s say you’re single, and your taxable income after deductions is $39,000. For 2014, you are in the 15% marginal tax bracket, which tops out at $39,150. If you receive a year-end bonus of $1,000, the first $150 will be taxed at 15%. But you have now been bumped into the 25% marginal bracket, so the remaining $850 is taxed at 25%. If you think your income won’t increase in 2015, you might see about delaying your bonus to January, delaying that bracket increase another year.
Another idea, and actually a much better one, is to participate in your company’s retirement plan. The idea is familiar, but are you doing it? You can reduce your taxable income significantly if you participate; in 2014 the maximum allowable salary deferral (deduction from your salary or wages) is $17,500 for a 401(k), or $23,000 if you’re 50 and older. If your company has a SIMPLE IRA, you can defer $12,000, or $14,500 if you’re fifty and older. Your retirement contribution reduces your taxable income. On top of that, many plans require an employer to match your contributions to at least 2-3% of your salary, which means you’ve just earned a return on your money without even formally investing it! How does that work? Let’s say you earn $50,000, and you defer 10%, or $5,000, into your retirement plan. Because you’ve deferred at least 3% of your salary (which would be $1,500) your company is required to put $1,500 into your retirement account. Your income for income tax purposes is $50,000 – $5,000 = $45,000.
If your company doesn’t offer a retirement plan, consider contributing to an Individual Retirement Account (IRA). You have until April 15, 2015 to make a contribution you can deduct on your 2014 income tax return. It’s one of the few times you can change your tax situation after the end of the year.
If you itemize deductions and find your itemized deductions are almost the same amount as your standard deduction, consider bulking some of those deductions in one year in order to itemize, then take the standard deduction the next year. You can do this by paying your property taxes in full before Dec 31, rather than half in the fall and half in the spring. If you know you’ll keep your car for a couple more years, pay a two-year registration in the year you want to itemize. These don’t make a huge difference, but they could mean a couple hundred dollars you get to keep. I’m sure you could find a better use for that money than income tax!
To your better wealth,
