End of the Year Tips: Defer Income
The end of the year is the appropriate time to make financial adjustments to lower your tax bill for the year. Making adjustments to your income can make a greater difference in bringing down your tax liability, as taxes on income are charged at the considerable rate of 12% for income groups $19,050 – $77,400, 22% for income groups $77,400-$165,000, and $165,000-$315,000 is 24% for 2018-2024.
Deferring income is a tax strategy to lower your annual tax bill. You can expect your tax bracket to remain the same or drop down to a lower bracket should you decide to defer income. If your income bracket is expected to rise, you may be able to advance the receipt of income to 2020 to pay taxes in the lower bracket. Seeking the advice of a tax professional is sometimes best before making decisions such as deferring your income. Contact RMS Tax Consulting at (520) 448-3531 and speak with Enrolled Agent Richard Schickel for a free consultation.
Deferring Your Income
Income is taxed in the year in which it is received. If you are due a bonus or a payment in December 2019, you can postpone receiving it to 2020 and avoid paying taxes on it this year.
As an employee, you have certain restrictions when it comes to deferring income, as you cannot postpone the receipt of your employer’s paychecks. However, if you have income from other sources that can be postponed, you may want to consider deferring it to early next year.
However, if you are self-employed, a freelancer or consultant, you have more room to maneuver. For example, a smart way to defer your income would be to delay the billing until the beginning of 2020 to lower your income tax.
If you are planning to sell assets, you can avoid paying tax on capital gains by deferring the sale or the receiving of capital gains to next year.
Additionally, you may take distributions from an IRA at the beginning of the next year rather than this year, if your type of IRA charges taxes at the time of withdrawal. If you save in a Roth IRA, you can withdraw anytime without having to pay taxes at the time of withdrawal. However, with a traditional IRA, you can only avoid paying income tax on a withdrawal if you hold off until 2020.
Deferring Your Deductions
If you expect your income to increase next year, you may defer your deductions. You can postpone paying bills for expenses such as medical costs, property tax and charitable contributions. Consider all your expenses that are tax deductible that have also not yet been paid.
Small adjustments eventually lead to big savings. By using tax strategies such as deferring income, you can pay less in taxes to the IRS each year. Deferring your income and deductions can make a difference in your taxable income. Contact RMS Tax Consulting at (520) 448-3531 and speak with Enrolled Agent Richard Schickel for the best options for you.