Are you Planning to Pay Less Tax Next Year?

Planning the type and sources of your income could save a lot money in taxes.

The source of your income determines your tax rates and tax liability. Taxpayers benefit from the lowest rates available when they have diverse sources of income, like real estate, stocks, bonds, mutual funds, and other sources. The income that you receive from these investments, if invested for more than 1 year, is taxed at long-term capital gains rates, which are lower than federal income tax rates.

 Careful tax planning strategy could help taxpayers estimate their tax liability by controlling the type of income, the character of the gain, and the tax rate of their income. For example, are you going to sell today, July 6 to realize a gain of $50,000 that will be taxed at the maximum 37% rate, ordinary rate, or wait to sell on July 7 or after to realize the same gain of $50,000 that will be taxed at the maximum rate of 20%, capital gain rate? Timing is critical. Should you liquidate an asset or assets with lower fair market value (FMV) to be taxed at ordinary income tax rate in lieu of liquidating an asset or assets with a higher FMV?

The capital gains and dividends tax rate on long-term gains is 20% for higher income taxpayers at the end of the 37% tax bracket. For any taxpayer in the 22%, 24%, 32% and 35% tax bracket, the capital gain tax rate is 15%. The rate is zero for taxpayers in the 10% and 12% tax brackets. There is no tax liability on the interest earned when taxpayers invest in municipal bonds.

If your business has been profitable this year, have you planned to contribute more in a qualified retirement plan? Are you postponing receiving payments from clients or vendors? Are you you paying yourself a salary comparable to people in your line of business? Are you hiring your children? Are you purchasing equipment or items for your business?

Donna and Donald have the same amount of income. However, because their timing and their income sources are different, and everything else being equal, one of them has a very much less tax liability.

The working taxpayer must pay income tax on salary or business income at ordinary income tax rates, which can be as high as 37%. The Tax Cuts and Jobs Act of 2017 (TCJA), changed the top corporate tax rate from 35% to one permanent flat rate of 21%.

You could reduce your tax liability by proper tax planning strategy as individual or business owner?

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