The end of the year is the appropriate time to make financial adjustments to lower your tax bill for the year. Making adjustments in income can make a greater difference in bringing down the tax liability, as taxes on income are charged at the considerable rate of 28% for income groups $90,751 – $189,300, and 35% for income groups $411,501 – $413,200 for 2015.
Deferring income is a tax strategy to lower your annual tax bill. Only taxpayers that expect their tax bracket to remain the same or drop down to a lower bracket should defer income. If the income bracket is expected to rise, they may be able to advance the receipt of income to 2016 to pay taxes in the lower bracket.
Income is taxed in the year in which it is received. If you are due a bonus or a payment in December 2017, you can postpone receiving it in 2018 to avoid paying taxes on it this year.
Employees have certain restrictions when it comes to deferring income, as they cannot postpone the receipt of their paychecks. However, if they have income from other sources that can be postponed, they may consider deferring it to early next year.
The self-employed, freelancers and consultants have more room to maneuver. For these individuals, delaying billing until the beginning of 2018 is a smart way to lower income tax.
Those who are planning to sell assets can avoid paying tax on capital gains by deferring the sale or the receiving of capital gains to next year.
Additionally, taxpayers may take distributions from an IRA at the beginning of the next year rather than this year, if their type of IRA charges taxes at the time of withdrawal. Those who save in a Roth IRA can withdraw anytime without having to pay taxes at the time of withdrawal. However, those with a traditional IRA can avoid paying income tax on a withdrawal if they hold off until 2016.
If you expect your income to increase next year, you may defer your deductions. You can postpone paying bills for expenses such as medical costs, property tax and charitable contributions. Consider all your expenses that are tax deductible that have also not yet been paid.
Small adjustments eventually lead to big savings. By using tax strategies such as deferring income, taxpayers can pay less in taxes to the IRS each year.