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Now's the Time to Plan to Reduce Next Year's Income TaxesTo Pay As Little Tax As Possible, You Have to Plan a Year Ahead Besides the obvious tax reduction strategies, such as itemizing deductions, there are other steps you can take to lower your tax bill next year. The trick is to plan ahead. If you wait until it's time to file your income tax return, it's too late for some of the best tax-reducing strategies. Here are some of the things you should be thinking of early in the year to save yourself money. Contribute to a Retirement Plan--If you're not contributing to a 401(k) or other retirement plan, you're passing up some of the best tax savings available. Contributions to 401(k) plans are not subject to federal or most state income taxes. Your contributions and employer match will grow tax-deferred until you withdraw them during retirement. You could save between 20 and 40% of your contribution in taxes. 2. If you're already contributing to a 401(k) or other employer-sponsored plan, increasing your contributions early in the year will increase your tax savins and your earnings over time. If your employer doesn't offer a retirement plan, contributing to an IRA each year can get you some of the same tax savings. For increased earnings, don't wait until April 15th to open your IRA. The earlier in the year you make your contribution, the faster it will grow. Take Advantage of Lower Long-term Capital Gains Tax Rates--If you plan to sell a capital asset, such as stock or other investment, make sure you hold on to it long enough to take advantage of the new, lower long-term capital gains rates for assets held for at least one year. If you miss the one-year mark by even a day, you'll pay ordinary income tax rates on any gain on the sale. Just a few years ago the maximum long-term capital gains rate was 20%. Now it's only 10% if you're in the 15% income tax bracket and 15% if you're in the 25% or higher tax brackets. Not all assets qualify for the lower capital gain rate, so check with your tax preparer or the IRS. |
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