You can pay lower income taxes by increasing your tax breaks.
The new year has arrived and now is a great time to brighten your
financial picture. Start by saving for retirement and keeping your
income taxes as low as possible. Here are some useful suggestions that may help you accomplish this goal.
How to Keep Your Income Taxes Low
Defer your income. The law states that income should be taxed in the year it is received. Keeping this in mind, you can defer your year-end bonus to the following year, provided your company pays year-end bonuses the following year. On the other hand, if you are a freelancer or are self-employed, you can delay your billings until the final weeks of December so that you will receive the payments by early January. This works best if you know that you will be in the same income bracket next year and any additional earnings would not push you into a higher tax bracket.
Accelerate deductions. You may also lower your taxable income by accelerating deductions so consider donating to your favorite charity. You may also want to accelerate deductions for a medical bill, interest payments, state and local income taxes, and/or a property tax bill due early next year. However, please be aware that if you are already in the alternative minimum tax (AMT), this move may cost you money.
Use your losses to offset gains. You can sell losing investments such as stocks and mutual funds to realize losses and use it to offset your taxable gains. As a rule, if your losses exceed your gains, you can use up to $3,000 of your excess loss to wipe out other income. If you incur more than $3000 in losses, it can be carried over to the next year and used to reduce your other taxable income.
Max out your retirement account contributions. Making the maximum contributions to your 401(k) can help you lower your income taxes and allow your retirement savings to grow tax-deferred at the same time. You should also consider contributing to an IRA to further maximize your tax breaks.
Don’t let your gift tax exclusion go to waste. Remember, you can give up to $14,000 per year to as many people as you wish without worrying about gift or estate tax, so use it to your advantage.
