A Palm Beach County Estate Planning Attorney Discusses Three Basic Tax Planning Strategies
Many people do not understand tax planning, and therefore simply ignore it. However, not all aspects of tax planning are complicated. Generally speaking, tax planning is the process of reducing the amount of taxes you pay each year. It naturally follows that the less you pay in taxes, the more disposable income you will have. Tax planning is an important aspect of estate planning overall.
Although for certain people; for example, owners of large businesses or business entities, the process of reducing taxes does indeed become complicated, and most of these people and entities spend significant time with their professional accountants using complex strategies to reduce their taxes. Still, for most of us, there are three basic methods that anyone can use to reduce their taxes, as discussed below. If you find yourself struggling with your taxes, a Florida and Palm Beach County estate planning attorney at Comiter, Singer, Baseman & Braun is available to help.
IRS Income Tax Brackets
You need to be aware of what tax bracket you are in before you can seriously consider applying any sort of tax strategy to your financial profile. If you are close to a lower tax bracket, you should look for ways to reduce your income by at least enough to fall into a lower bracket. A lower tax bracket will have a substantial positive impact on your taxes.
For example, in 2021 if you and your spouse earned a combined income of $170,000 you are being taxed in the 24% bracket. You fall just $2,751 short of meeting the lower 22% tax bracket. By employing some of the strategies below you may be able to reduce your income to the lower level, saving you an additional 2% of your tax liability.
It is strategies like this (and many much more complex) that a Florida and Palm Beach County estate planning attorney at Comiter, Singer, Baseman & Braun can assist with to help you keep more money in your pocket. We encourage you to reach out and learn how a professional estate planning law firm can help you better manage your money.
#1 Reduce Your Overall Income
As mentioned above, reducing your overall income may give you the significant advantages that come with being taxed in a lower bracket. However, there are other tax benefits that come with reducing your income even if you cannot hit that lower tax bracket. Generally speaking, your adjusted gross income (AGI) is considered the most important facet of tax planning.
Your AGI is the amount of your income that is actually taxable and is therefore much more important than, say, your gross income in the context of tax planning. Your AGI is what you have left after you have made various types of deductions, such as paying off student loan interest, contributions to your retirement plan like your 401(k) or IRA, and other types of adjustments that vary from individual to individual.
The individual adjustments allowed, which can be found on a 1040 form, often depend on certain classifications, such as:
- Medical Savings Account, Form 8853
- Educator Expenses
- Expenses for Reservists, Performing Artists, and Qualifying Government Employees
- Health Savings Account, Form 8889
- Moving Expenses (only for military service members after 2017)
- Contributions to SEP, Simple and Qualified Plans
- Self-Employed Health Insurance
- Penalty on Early Withdrawal on Savings or CD
- Alimony Paid (divorce decree prior to 2019)
- IRA Deduction
- Nondeductible IRAs
- Student Loan Interest Deduction (1098 E)
- Tuition and Fees Deduction (1098-T expired in 2018)
- Domestic Production, Form 8903 (expired)
- And others
Of all of the adjustments for decreasing your AGI, saving for retirement is one of the more attractive ways of reducing your income, because it also helps you save for your future.
It is important to think of contributions to retirement plans, such as the aforementioned 401(k)s or IRAs, as one-way streets. Be sure you can afford to make these types of contributions, because once you do, they will be unavailable, for financial reasons, until you reach a certain age, usually 60 years old. Although technically you can withdraw from these funds before the required age, the financial consequences are severe. First, any money you withdraw early will be added to your taxable income. Even more importantly, you will incur a financial penalty, commonly around 10%.
#2 Increasing Your Deductions
You can also look into ways to increase your taxable deductions. According to the U.S. News Money section, some common deductions may be available if you:
- Properly claim children, friends, or relatives you are supporting
- Do not take the standard deduction if you can itemize
- Deduct charitable contributions, even if you do not itemize
- Claim the recovery rebate if you missed a stimulus payment
- Contribute to your retirement or other qualified plans
- See if any lesser-known credits could apply to you
Over the course of any given year, these deductions can add up quickly. When speaking with your accountant, tax preparer, or an experienced Florida and Palm Beach County estate planning attorney at Comiter, Singer, Baseman & Braun, you should discuss if it is best for you to itemize or take the standard deduction. If you plan to itemize, it is important to keep a list of your potentially deductible expenses throughout the year, accompanied by supporting receipts. You can set up a simple spreadsheet online and add line items every time you pay a taxable expense.
#3 Utilize Tax Credits
One primary benefit of effective tax planning is that it helps you to plan for the future. Without a tax plan in place at the beginning of each year, you risk missing out on a number of tax credits that you simply are not thinking about during the normal course of the year. Tax credits are a perfect example of how the government uses financial incentives to motivate certain behaviors. For example, tax incentives are used to encourage making charitable donations. Tax credits do not reduce your taxable income, rather they can be deducted from your overall taxes owed. When utilized properly, they can significantly reduce your tax debt.
A Florida and Palm Beach County estate planning attorney at Comiter, Singer, Baseman & Braun can help you identify any tax credits that may be available to you. A few of the most substantial tax credits include:
- Lifetime Learning Credit. The Lifetime Learning Credit, established to offset the costs of post-secondary education, is available for any year of post-secondary education. The credit may be as high as $2,000 per eligible student.
- Child and Dependent Care Credit. The Child and Dependent Care Credit is meant to help reduce the costs of daycare or babysitting. The credit is available to people who have to pay for childcare.
- Savers Tax Credit. The Savers Tax Credit is available for eligible contributions to retirement plans, such as IRAs or 401(k)s. Those with the least amount of income qualify for the largest credit, which can be as high as $1,000 if filing as a single, and $2,000 if filing jointly. The credit was formerly known as the Retirement Savings Contributions Credit.
- Earned Income Credit. This credit is among the most substantial credits available. This credit was designed to offset Social Security taxes and to provide an incentive for people to work, thereby reducing the burden on the government’s welfare system.
- American Opportunity Tax Credit. For many years, a credit known as the Hope Credit helped families pay for higher education. In 2009, the Hope Credit was expanded and is now known as the American Opportunity Tax Credit. The credit covers up to four years of post-secondary education. The claiming student must be enrolled at least half-time for at least one academic period and is available on a per-student basis.
A Florida and Palm Beach County Estate Planning Attorney at Comiter, Singer, Baseman & Braun Can Help Demystify Your Tax Planning
A Florida and Palm Beach County estate planning attorney at Comiter, Singer, Baseman & Braun can help evaluate your tax responsibilities and make improvements. Contact us today for your initial consultation and to learn more. We look forward to potentially working with you.