Preparing for Tax Day
Tax Day is coming up on April 18th this year! When we have finances on the brain, it is a good time to consider your long-term tax strategies and brush up on your tax terminology. Check out these important tax terms below and start brainstorming ways in which you’ll be able to decrease your tax bill.
Think of a tax credit as a direct, dollar-for-dollar advantage. You can subtract this amount from your tax bill directly and can find this benefit in many forms. For example, the child tax credit and earned income tax credit can be used for low-to-moderate-income taxpayers. So if you fall into this category you can cash in on this benefit!
Instead of a decrease directly on your tax bill, a tax deduction is the reduction of your overall taxable income. Essentially you are able to get money back for money spent on deductible items, like the charitable donation deduction, the mortgage interest deduction, and the home office deduction. If you were in the bracket that gives you $0.28 on the dollar, you’d be getting $28 back for every $100 you spend on these deductible expenses.
A tax deferral is essentially what it sounds like: deferring the payment of your tax bill to a later date. This usually happens with a 401(k) or IRA. This can be a helpful move but may lead to a larger tax bill later on. It is also important to remember that you will most likely have to start taking RMDs, Required Minimum Distributions, from your deferred accounts when you turn 72. Keep this in mind because it could mean a bigger tax burden when the time comes!
Tax Minimization Plans
Unfortunately, even when we retire, your tax bill will not stop coming every year. Taxes in retirement are just as big of a deal even without a regular paycheck and planning for the additional tax dollars taken from your different retirement accounts and benefits is one of the most important steps you can take for your future. Luckily there are some strategies you can utilize for tax minimization like converting part or all of your traditional retirement account to a Roth IRA, bunching your itemized deduction, and using potentially tax-free life insurance proceeds. There is no catch-all solution for tax situations, and that is where we can help!
Click here to schedule your complimentary financial info session where you can learn about our offerings and we can learn about your specific needs. Retirement plans are different for everyone depending on different income levels and unique tax situations. At Moore’s Wealth Management, we can help you create a tax minimization strategy as part of your overall retirement plan.