As the end of the year approaches, many people engage in tax planning. This is particularly true for business owners but even on relatively simple returns, end-of-year tax planning can pay a return. I want to share an example of this today.
Let’s say you are a young pregnant married couple that this year will have taxable income that places you in the 22% tax bracket. Next year, you are planning to go down to one income and you will be in the 12% bracket.
This means ideally you would pull forward deductions into the 22% bracket and push out income to the 12% bracket. There are several ways you can do this. I will provide one quick example below.
If you itemize tax deductions both years, you could make your January or even multiple months of charitable contributions in December for the upcoming year. If you pulled forward, $1,000 of next year’s charitable contributions into this year you would likely save $100 in Federal tax.
I maybe should not have said “easy” $100. You have to know your tax situation for this year and an estimate for next year to do this planning. Also, oftentimes simply knowing your tax bracket may not be enough to make the decision. For example, reducing or increasing income could be changing other deductions or credits which actually changes your tax liability at a different rate than your tax bracket.
This is essentially one way to engage in tax planning though. If you believe that in next year, your income would be greater or less than this year, it is possible to engage in tax planning to reduce your overall taxes across the two years.
Interesting Article(s) or Video(s)
A Wealth of Common Sense - The Current State of the Economy & Markets
Fascinating quick read - especially if you like charts.
Thank you for reading!