As you prepare to file your 2020 personal income taxes and plan for 2021, Busey encourages you to consider the following tips—allowing you to decrease federal income taxes and keep more of your income.
1. Postpone your income to minimize your current income tax liability.
By deferring or postponing income to a later year, you may be able to minimize your current income tax liability and invest the money saved. When you eventually report the income, it's possible that you'll be in a lower income tax bracket.
By deferring or postponing income to a later year, you may be able to minimize your current income tax liability and invest the money saved. When you eventually report the income, it's possible that you'll be in a lower income tax bracket.
Certain retirement plans can help you postpone the payment of taxes on your earned income. For example, with a traditional 401(k) plan you contribute part of your salary into the plan, paying income tax only when you withdraw money from the plan. This allows you to postpone tax on part of your salary and take advantage of the tax-deferred growth of investment earnings.
There are many other ways to postpone your taxable income, including:
- contributing to a traditional IRA
- buying permanent life insurance (the cash value part grows tax deferred)
- investing in certain savings bonds.
For your specific tax planning options, we advise you speak with a tax professional.
2. Shift income to family members to lower the overall family tax burden.
You may be able to minimize your federal income taxes by shifting income to family members who are in a lower tax bracket. For example, if you own stock that produces dividend income, you have the option to gift the stock to your children. After you've made the gift, the dividends will represent income to them—potentially lowering your family's overall tax burden. Keep in mind that you can make a tax-free gift of up to $15,000 per year, per recipient without incurring federal gift tax.
You may be able to minimize your federal income taxes by shifting income to family members who are in a lower tax bracket. For example, if you own stock that produces dividend income, you have the option to gift the stock to your children. After you've made the gift, the dividends will represent income to them—potentially lowering your family's overall tax burden. Keep in mind that you can make a tax-free gift of up to $15,000 per year, per recipient without incurring federal gift tax.
3. Deduction planning involves proper timing and control over your income.
Be sure to take advantage of all deductions that you are entitled to and time them in a beneficial manner.
Be sure to take advantage of all deductions that you are entitled to and time them in a beneficial manner.
As a starting point, you'll have to decide whether to itemize your deductions or take the standard deduction. Generally, you'll choose whichever method lowers your taxes the most. If you choose to itemize, be aware that some deductions are allowed only to the extent that the deduction exceeds some percentage of your adjusted gross income (AGI).
Because you can sometimes control whether a deductible expense falls into the current tax year or the next, you may have some control over the timing of your deduction. If you're in a higher federal income tax bracket this year than you expect to be in next year, consider accelerating deductions into the current year. You can accelerate deductions by paying deductible expenses and making charitable contributions this year, rather than waiting until next.
4. Investment tax planning uses timing strategies and focuses on your after-tax return.
Consider making tax-conscious investment choices by utilizing strategies such as tax-exempt securities and intentionally timing the sale of capital assets for maximum tax benefit.
Consider making tax-conscious investment choices by utilizing strategies such as tax-exempt securities and intentionally timing the sale of capital assets for maximum tax benefit.
Certain investments generate income that's exempt from tax at the federal or state level. Additionally, you can exclude the interest on certain municipal bonds from your income. Although interest on municipal bonds is generally tax exempt, certain municipal bond income may be subject to the federal alternative minimum tax. When comparing taxable and tax-exempt investment options, focus on those choices that maximize your after-tax return.
In most cases, long-term capital gain tax rates are lower than ordinary income tax rates—meaning the amount of time you hold an asset prior to selling it can make a big tax difference. Timing the sale of a capital asset, such as stock, is also beneficial. If you expect to be in a lower income tax bracket next year, consider waiting to sell your stock. If you have capital losses this year that you can use to offset the resulting gain, you might want to sell your assets this year to accelerate income.
Note: Do not decide which investment options are most appropriate based on tax considerations alone—nor should you decide when, or if, to sell an asset solely based on the tax consequence. A financial or tax professional can help you decide what choices are right for your specific situation.
5. Year-end planning focuses on your marginal income tax bracket.
Year-end tax planning typically takes place in October, November, and December—generally looking at ways to time income and deductions resulting in the best possible tax result. This may mean postponing income to the following year and accelerating deductions into the current year. The right year-end tax planning moves will depend on your individual circumstances.
Year-end tax planning typically takes place in October, November, and December—generally looking at ways to time income and deductions resulting in the best possible tax result. This may mean postponing income to the following year and accelerating deductions into the current year. The right year-end tax planning moves will depend on your individual circumstances.
The information provided is for general informational purposes only—it is not intended to be specific tax advice. To discuss solutions tailored to your unique situation, please contact the experts at Busey Wealth Management or your personal tax advisor.
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