Reducing Taxable Income⎥ Long Island, New York Advisor

Rossiter Financial Group, INC.

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What does it mean to reduce taxable income?

Reducing your taxable income is one of the most effective ways to lower your taxes. Taxable income is the amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year. This is generally described as adjusted gross income, your total income minus any deductions or exemptions allowed in that tax year.

How can reducing taxable income help me?

Having less taxable income means having less tax. For example, 401(k)s are a popular way to reduce taxes. The IRS does not tax money diverted directly from your paycheck to a 401(k). Essentially, reducing taxable income is an optimal way to ensure that you are not over-paying for taxes and optimize your money to make the most out of what you have coming in and what you are investing in your retirement.

Smart Ways to Lower Your Taxable Income

1. Top off Your Retirement Savings Plan – Money contributed to your employer-sponsored retirement plan, like a 404(k), is not included in your taxable income. Contribution limits vary by year and by your age at the time of contribution. You can contribute self-employment income from a side job or side gig to a Simplified Employee Pension in amounts of up to 20% of your net self-employment income. Depending on your income, you can also deduct contributions to an IRA.
2. Give to Charity – If you itemize your deductions, making charitable contributions before the end of the year can reduce your taxable income. For cash contributions, hold on to the canceled check or statement to show proof of your donation. In some cases, you’ll need acknowledgment from the charity. Donating appreciated securities can reduce your taxable income. When you donate appreciated securities that you have owned for more than one year, you can deduct the securities’ full value on the gift’s date.
3. Defer Income Until Next Year – If you get a year-end or holiday bonus, ask that it be paid next year. Deferring the compensation until next year will prevent the excess income from being added to your taxable income for the current year. If you’re self-employed, you can send bills to your clients later in December so that payments come in after the first of the year.
4. Max Out Tax-Deferred Savings – An effective way to minimize taxes is to set money aside in a tax-deferred retirement account. While saving for your retirement, you can also trim your income enough to enter a lower tax bracket. If your employer offers a tax-deferred program such as a 401(k), make sure you are participating and maximizing your contributions.
5. Avoid Double Taxation on Your Investment Earnings – If your mutual fund dividends automatically reinvest in extra shares, a typical investment practice, remember that each reinvestment increases your tax basis in the fund. That, in turn, reduces the taxable capital gain when you redeem shares in a taxable account. Forgetting to include reinvested dividends in your basis can result in double taxation of dividends-once in the year that they are paid and reinvested and later when they’re included in the sale proceeds.
6. Flex Your Spending Power – Sometimes, it can be useful to spend money elsewhere to mitigate taxes. Many employers have benefits that allow team members to reduce taxes by using money they had planned on spending already, such as dependent care or medical expenses. Flexible spending plans are pre-tax plans requiring certain costs, like dependent care and medical bills, to be paid with tax-exempt dollars.

Key Takeaways

There are many smart ways that taxpayers can reduce taxable income. Some may be smart for you, and others may not be. It is all dependent on your individual and unique situation. Rossiter Financial Group, an independent financial advisory firm, can work directly with you to minimize taxation and maximize retirement contribution. Reducing your taxable income can be helpful, and we can get you on the right track. We will develop a smart, comprehensive plan to find the best ways that work for you.