With April 15th less than a month away, it seems like taxes are on everyone’s mind right now. It’s also at this time of year when people get really motivated to reduce their taxes. Do you need some motivation? Look at line 63 on your form 1040 to see how much federal income tax you paid last year! Gulp! That’s not even counting state income tax, property tax, sales tax, and sometimes gift and estate tax (yikes). Who says you’re not patriotic??
Ok, now that I have your attention and you’re good and motivated, we’re going to walk through a simple but effective way to help lower your taxable income.
No, we’re not going to double-check deductions, exemptions, or credits. And it’s not tax free bonds (although that’s a good guess it can be great for tax free income). It’s certainly not buying that index annuity like your insurance agent recommends - ugh!
What is it? An easy to implement and less pressure filled way to lower your taxable income: Increase contributions to your employer sponsored retirement plan. It’s easy to do, it lowers your taxable income, and you’re further securing your own retirement. Isn’t it funny how sometimes we don’t see the obvious?
When people come into our office, we examine their tax returns carefully - looking for ways to reduce their taxes. We don’t just look at your tax return once, but every year. 401k participation is an example of things we look for. It’s funny, someone will come in upset - and rightfully so - about how much they pay in taxes, yet they’re not maxing out contributions to a 401k plan. Then we see they have large balances in their checking and savings accounts crawling along at ¼% interest. And their paying tax on that little tiny dab of interest at their highest tax bracket. So what they are doing is they’re putting too much into a taxable savings account and not enough into a tax-deferred 401k plan.
Wouldn’t it be better to let that money grow with no tax in your 401k plan rather than pay high taxes in a savings account?
The amount you can add to a 401k plan for 2015 it is the lesser of $18,000 or 100% of the employee’s compensation. Also, if you’re age 50 or older, you can make an additional catch-up contribution of $6000. So you could potentially defer salary up to $24,000 into a 401k plan.
This directly lowers your taxable income!
For example, if you are in the 28% tax bracket and you increased your 401k contribution by $10,000 you would save $2800 in taxes for the year. What could you do with $2800? You could very well move yourself into a lower bracket by increasing contributions – now we’re talking!
Again it is very simple to do, you’re lowering your taxes and helping yourself better prepare for retirement. If you need tax planning help and want us to examine your return just contact us to set up a meeting.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.