If you've recently crossed over into the category known as high-income, you may be wondering—what now? Once you've broken out of the paycheck to paycheck cycle and are able to fund all of your needs and many of your wants, it can be tougher to find direction when it comes to your finances. And the last thing anyone wants is to hand over even more of their hard-earned money to Uncle Sam. Learn more about some tax planning tips that can reduce your tax liability for 2020.
Optimize Your Bonus Payout Dates
If some of your compensation comes in the form of an annual or semi-annual bonus, you may be able to significantly reduce your tax bill simply by controlling when this bonus is paid out. For example, if you generally get your bonus at the end of the calendar year, splitting it so that half is paid out in the current year and the other half is paid out the next year can often prevent you from entering a higher tax bracket. This will reduce the tax rate you pay on both halves of your bonus.
For example, if you're single and earn $163,300 per year, you're solidly within the 24 percent tax bracket for 2020. But exceeding $163,301 in taxable income will bump your top marginal tax rate up to 32 percent. If you receive a $20,000 bonus for 2020 but arrange to have half paid out in 2020 and the other half paid out in 2021, you'll only pay the 32 percent tax rate on the $6,699 over $163,301 instead of $16,699, saving you around $5,000 in taxes.
Investigate Your Pre-Tax Deductions
Because the top marginal tax rate increases so steeply after you hit $163,301 in annual income (for singles) or $326,600 (for married couples filing jointly), good tax planning involves doing whatever you can to get your adjusted gross income below these thresholds. Pre-tax contributions like a 401(k), traditional IRA, SEP IRA, Health Savings Account, and flexible spending accounts can all reduce your taxable income.
You can set up a spreadsheet (or download software) that will allow you to easily calculate your AGI by plugging in your income, bonuses, and any deductions. This can allow you to see exactly how much you'll need to contribute to your IRA or another tax-advantaged account to reduce your income to a level you're comfortable with.
To learn more about paying taxes, contact a wealth management planning service near you.Share
30 June 2020
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