preparing for tax time all year long

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preparing for tax time all year long

Having a certified personal accountant working with you to prepare for your taxes throughout the year will help you in so many ways. Do you wait until the beginning of the year to get your documents in order to file your taxes? Did you realize that doing so could end up costing you money when you do file your taxes. This blog will show you some of the things that you could be missing if you aren't paying attention to your taxes until it is time to file. Maybe after reading, you will make changes to the way you go about preparing for tax time.


8 Legitimate -- And Easy -- Ways A High Earner Can Reduce The Tax Bill

If you're a high-income household looking at your tax bill for the past year, you probably wonder how you can reduce that bill for next year. While many tax credits and deductions "phase out" (are limited or stop altogether) for those earning a higher amount, there are still a number of legitimate -- and often easy -- ways to lower your taxes. Here are 8 ideas to put into practice to help make next year better.

Max Out Tax-Advantaged Accounts

The most basic way to reduce your taxes is to ensure that you take advantage of all available tax-advantaged accounts. These are accounts which reduce your taxable income by the amount contributed and which are not taxable until you take the money out. Such tax-advantaged accounts include:

  • Traditional IRA -- maximum contribution $5,500 per person ($6,500 if older than 65) in 2016
  • Health Savings Account -- maximum contribution $3,350 for individuals and $6,750 for a family in 2016
  • SEP/Simple IRA -- for self-employed earners, up to 25% of income or $53,000 in 2016
  • 529 College Savings Plan -- while the contribution isn't tax free, the earnings will be. Keep it under the Gift Tax Exclusion amount of $14,000 in 2016

Harvest Your Losses

The term "harvesting your losses" means selling taxable investments that are running at a loss at the end of the year. Why would you sell an asset at a loss? To offset gains in other investments. You can use up to $3,000 of losses to reduce your taxable gains in 2016, then carry forward the remaining loss into future years. This can turn a bad stock market year into an aid in future, better years. 

Pay Early

You can sometimes pay for something early in order to increase deductions or credits. If you have a dependent going to (or already in) college, you can deduct in the current year any tuition paid for the first 3 months of the following year. Similarly, if you're self-employed with few business expenses, consider purchasing any depreciable assets at the end of the current year instead. 

Donate Appreciated Property

You can give money to charity without touching your savings by donating property that has appreciated in value (for example, stocks, bonds, land or collectibles). This way, you can deduct as a charitable contribution the increased value of that item without spending a dime. 

Know the Thresholds

Understanding the various limitations, phase-outs and contribution limits can help you make choices with your money that will help during tax time. For example, a couple earning $250,000 in 2016 is subject to an additional Medicare tax of .9% as well as the Net Investment Income Tax of 3.8% on large investments. You may want to exert some control over your income to stay under some of these thresholds. One way to do this is to defer compensation, raises or bonuses until the following year. 

Give Some Away

Gifting money to others not only benefits them but also yourself. If you have income-producing stocks, for example, giving them away means that the taxable income produced in the future will go to the receiver instead of to you. If you have a large estate, giving money away now will also help ensure that your estate stays under the exclusion amount for the Estate Tax. Keep all annual gifts under the Gift Tax threshold of $14,000 per person ($28,000 if filing jointly). 

Get a Mortgage

Even if you don't need it, a mortgage or home equity line of credit (HELOC) can be a useful tax tool. Since a mortgage or (usually) a HELOC can be deducted when you itemize your taxes, you can reduce your tax bill. Interest rates are still historically low, so this is a good time to leverage your assets a little and invest the money to earn a higher rate than what you're paying on that mortgage. 

Hire a Professional

If this seems a little confusing to you, it may be best to work with a financial planner or accountant who specializes in strategic tax planning—like those at Karla Dennis and Associates and other offices. Tax planning involves not only understanding how to adjust your tax bill in the current year but also how to look forward 5, 10 or 20 years to ensure you pay the least amount possible in the future as well.  For a high-earning family, working with a knowledgeable professional is key to making the most of your money.