The midpoint of the year is a good time to look for ways to defer, manage, and reduce the income taxes you pay. Last year’s federal income-tax return can serve as a starting point for identifying areas where you may be able to lower your 2016 taxes. Read on for some strategies that may be helpful.
MAXIMIZE RETIREMENT PLAN CONTRIBUTIONS
Are you paying high taxes on your salary? If you participate in a 401(k) or similar retirement savings plan at work, increasing your pretax salary deferrals to the plan can help reduce your income-tax liability for the rest of this year. Although you’ll eventually be taxed when you take plan distributions, by then you may be retired and in a lower tax bracket.
If you are self-employed and don’t have a retirement plan, consider establishing one this year. There are several options available, and plan contributions are tax deductible (within limits).
LOOK INTO HIGHER EDUCATION TAX BREAKS
Are you earmarking some of your savings for a child’s future college education? A Section 529 college savings plan offers tax advantages that aren’t available with a regular savings account. Earnings on 529 plan investments accumulate tax free, and account withdrawals are not taxed when used for the account beneficiary’s qualified higher education expenses.
CONSIDER AFTER-TAX INVESTMENT RETURNS
For investments held outside of tax-favored accounts, there may be steps you can take to lower your tax burden on portfolio gains and earnings. For example, where it otherwise makes sense from an investment standpoint, holding appreciated securities for longer than a year before selling them allows you to take advantage of the lower tax rate on long-term capital gains. Or consider investing in municipal bonds, since interest is generally exempt from federal income taxes (and possibly state and local taxes). Owning dividend-paying stocks also may allow you to keep more of your earnings, since qualified dividends are currently taxed at the long-term capital gains rates.*
* Taxpayers with adjusted gross income exceeding a threshold amount may owe an additional 3.8% tax on capital gains, dividends, and certain other taxable investment income.
The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.
Article courtesy of Client Line Newsletter