While it’s better to earn higher income even when it means increasing your income tax payable, you can avoid bumping your income into a higher tax bracket. The trick is in spreading out your income more evenly over several years such that you stay within your current income bracket. You are essentially earning more income, perhaps even saving more, and yet paying almost the same amount of taxes!
Make Contributions to Retirement Plans
When you contribute to your retirements plans, such as a 401(k) plan and a traditional IRA, you are actually reducing your income at present – truly, a useful trick when you are in a higher tax bracket. You will also have a source of passive income in your retirement.
Of course, you will still pay taxes when you take out your retirement plans. But when you are already in a lower tax bracket after your retirement, your taxes will be substantially reduced, too.
For example, you are now in the 28% tax bracket since you are in active employment. Your contributions to a retirement plan will reduce your taxable income and, thus, your income taxes. You will likely be in a lower tax bracket at the time of your retirement, such as in the 15% category, which means lower taxes when taking out your money in the retirement fund.
Plan Your Asset Sales
When you sell your assets for a profit, your income tax bracket will obviously increase. You must then carefully plan your asset sales so as to spread out your profits evenly.
For example, instead of selling all of your profitable stocks in a single year, you can sell 50% this year and 50% the next year. You should also look at the long-term capital gains rates since these are usually lower.
Plan Your Deductible Expenses and Charitable Contributions
You must also make your deductible expenses and charitable contributions during the year when you are in the higher tax bracket. For example, if you are in the 33% tax bracket, you can save $33 in federal income taxes for your $100 contribution to charity. If you make the same contribution when you are in the 25% tax bracket, you will only save $25 on income taxes.
Better yet, you should discuss your options in reducing your income tax burden without evading your obligations with a tax consultant from Liberty Tax Service. You will find that most of the headaches that come with taxes will go away when you have a tax expert on board.