Of course, you have to pay your taxes promptly and accurately since performing your citizen duty is preferable to spending months, even years, inside a federal correction facility. You can, however, minimize your taxes even when you are in the high-income tax bracket with these proven strategies. You must ensure, nonetheless, that you work with a tax consultant at Jackson Hewitt on these matters so as to comply with the tax rules and regulations.
Maximize Your Retirement Contributions
If you ask your high-income friends, you will also know that deferral of taxation is a popular tax strategy. Your usefulness for it will also be doubled when you anticipate moving to a lower tax bracket in the future, such as when withdrawals or distributions are taken.
You should consider making a contribution up to the maximum amount allowed in your tax-deferred, work-related retirement accounts, especially when you earn more than you spend. You may also consider contributing the maximum contribution allowed on your traditional IRA in case your income doesn’t exceed the IRS-mandated threshold. You will find that these contributions will reduce your taxable income on a dollar-to-dollar basis.
Plus, you will benefit from a higher retirement contribution in your retirement years so it’s a double benefit.
Make Charitable Gifts
But don’t just make indiscriminate charitable gifts when you want to minimize tax payments. Your tax consultant will assert that this is a useful strategy when you can itemize the tax deductions, such as mortgage interest deductions, and you plan on making donations to qualified charitable organizations.
If you want to donate, your better bets are appreciated assets since these are among the most tax-efficient. When you donate appreciated assets, you will be avoiding the payment of capital gains taxes, which can result in substantial tax savings.
For example, you have a choice between donating $20,000 in cash and $20,000 in stocks purchased for $2,000 about 10 years ago. In either case, the charitable organization will receive $20,000 in cash since it can sell the shares and collect the proceeds, tax-free. You will also receive an income tax deduction for $20,000 in either case with the assumption that the donation was limited to 30% of your adjusted gross income or less.
But if you donated the shares, you will avoid paying the $18,000 in capital gains. You may then decide to use the $20,000 cash, which you kept, to repurchase the stock with the new basis being $20,000 rather than the $2,000.
Indeed, there are effective and efficient ways to be a good American citizen yet keep most of your hard-earned money to yourself.