The end of the year is the perfect time for taxpayers to make financial adjustments to lower their tax bill for the current year. Making adjustments to income may help reduce tax liability. Income is typically taxed in the year it is received, however, if you don’t have to pay tax today and may pay it tomorrow, why not? Deferring income is an excellent strategy to lower an annual tax bill. However, only taxpayers that expect their tax bracket to remain the same or decrease to a lower bracket should defer income.
Employees are subject to certain restrictions for deferring income, as they may not postpone the receipt of paychecks. However, they may defer income from other sources, such as a year-end bonus as long as it is a standard practice for the employer to pay year-end bonuses in the following year.
However, those that are self-employed, freelance and perform consulting services may delay income until the beginning of 2017 to lower income tax. For example, delaying the billing of services until late December may ensure that payments aren’t received until the next tax year.
Whether you are employed or self-employed, you may also defer income by taking capital gains in 2017 instead of in 2016. Additionally, taxpayers may take distributions from an IRA at the beginning of the next year rather than in this year if their IRA charges taxes at the time of withdrawal. Taxpayers with money in a Roth IRA may withdraw funds anytime without having to pay taxes at the time of withdrawal. However, those with a traditional IRA may only avoid paying income tax on a withdrawal if they wait until 2017.
Taxpayers may also defer deductions if they expect income to increase next year. You may postpone paying bills for expenses such as medical costs, property tax, and charitable contributions. Consider any expenses that are tax deductible that have also not yet been paid.
Again, it only makes sense to defer income if you think you will be in the same or a lower tax bracket next year. You don’t want to be hit with a bigger tax bill next year if additional income may push you into a higher tax bracket. If this is likely, you may want to accelerate income into 2016 to pay tax on it in a lower bracket sooner, rather than in a higher bracket later. Small adjustments eventually lead to big savings. By using tax strategies such as deferring income, taxpayers may pay less in taxes each and every year. An experienced and knowledgeable tax professional can help any taxpayer make this analysis.
It is wise for taxpayers, whether an individual or business located in the New York or Tri-State area, to consult with a tax professional to help any assess their current tax situation looking ahead to the future. If you have any question about taxes, especially in planning ahead for the next filing season, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
