Taxes – we all are interested in planning for it, but what are the key factors we need to keep in mind while making the right plans? Our business experts have picked the most important concerns related to tax planning and have provided options and suggestions which will come handy for taxpayers. Check the topmost factors to keep in mind while dealing with tax planning.
Changes to employee benefits for the current year
Flexible Spending Accounts (FSA), Dependent care Flexible Spending Arrangement, and Health Savings Accounts (HSA) – need to be reviewed and managed; bearing in mind the expenses that arise with the changes and developments taking place in our lives. Things like medical expenses – expecting a child, going for glasses or opting for laser vision correction surgery, and others – are indications that it’s time for you to make additions in your FSA. This gives you the benefit to utilize the pretax money which the medical expenses take out from your pocket. These ‘additions’ in your FSA help you manage the expenses of prescriptions and those doctor co-pays for the year. Also, this makes the overall tax bill stay lower. And in case you file for joint tax returns and have a kid in daycare, you can earmark an amount close to $5000 a year for pretax to handle the daycare bills.
Income… Knowing the ‘when’ to plus and ‘when’ to minus.
- Higher tax bracket: People expecting to move to a higher tax bracket by the start of next year need to find ways to bring in more income for the next year than the current year. Those of us to be retired next year need to immediately start the process of bringing in Individual Retirement Arrangements (IRA) distributions. If you are self-employed, you should focus on making your clients pay up before the current year ends.
- Lower tax bracket: If you seem to remain in the lower income bracket for the next year too, you should try to defer your annual bonuses at least till January. Nonqualified stock options are usually categorized as income, so delay these too. IRA distributions should also be postponed.
Roth IRA conversions
These days, many people who save money following the traditional IRA are converting some of their savings into Roth IRA. If you opt for Roth IRA, you will be paying taxes on the savings now but the earnings Tax Planner will keep moving ahead completely tax free – a great tax-saving option for people miles away from retirement. It is also a good option for people under the low tax bracket.
Managing gains and losses on investments based on your tax position
Thinking about investments, if you have high gains and you fall under the lower tax bracket, the best option is to sell off your well-performed investments to get the benefits of low taxes coming from its earnings. Financial planners have mentioned that the long term tax rate for capital gain is 0% for people in the 15% tax bracket or lower. And if your investments have not been favorable, then immediately Tax Planner realize the losses to keep the capital gains tax at a minimum.
Making charitable deductions by the end of the year can help people with higher incomes move to lower tax bracket. Let’s say you had made an investment of $4000 and now its security worth is $10,000. To use this money for charitable causes, if you sell the stocks and make the donation in cash, then on your $6000 gain, you’d land up paying 15% capital gains tax. Instead, if you choose to gift the security, you’ll be saving yourself from the tax and also be making your donations without any deductions.