After working endless hours and at times overtime, it’s nice to get your check at the end of the pay period. Money is your reward for a job well done. Unfortunately, the dollar doesn’t stretch as far as we would like these days. With soaring rents, higher utility costs and increasing local property and sales taxes it is harder to hold onto your money than ever before.
One of the ways you can proactively save more money is to do in-year tax planning and closely monitor your tax brackets. In the United States, we have a graduated or progressive tax system where tax rates increase as income levels increase. As an example, for a single individual taxable income under $9,700 is currently assessed at a 10% tax rate. If your income reaches a level of $100,000 all taxable income from $84,201 to $100,000 would be at the much higher 24% rate.
If someone says they are interested in finding out what my tax bracket is, it’s helpful to refer them to a tax calculator that shows the brackets that apply to their situation. By doing income and tax forecasting, you can adopt strategies that help reduce your annual tax obligation.
The Effect of Moving Up a Bracket
If a single taxpayer makes $39,475 in taxable income their highest tax rate is only 12%. Let’s assume, though, that in the current year it’s estimated that the person’s income Is set to jump by $10,000. That extra income will, unfortunately, be taxed at a rate of 22% which is considerably higher than the 12% rate. Tax brackets change from year to year so it’s helpful to make sure you have current information.
Accelerate Your Deductions
By accelerating or bunching your deductions into the current year you will save $220 for every $1,000 reduction in your taxable income. For instance, you can make an extra mortgage payment before the year end so you can take off the extra interest on this year’s taxes. Again, the reward is that you earn $220 for every $1,000 your taxable income is lowered within the bracket. If you are filing as married, there are different levels for each of the marginal tax rates.
Another worthwhile strategy to reduce taxable income is to move up medical or dental treatments planned for next year into the final calendar quarter of the current year. You can also make a prepayment on property taxes so that the extra money spent will become a deduction for this year. To help further reduce your tax obligation at the higher bracket, you can also move up and make substantial charitable donations in the current year instead of spreading them over multiple years.
By carefully monitoring your current top tax bracket, you can make informed choices about how to reduce your taxable income and save money by lowering your marginal tax rate. The savings can be substantial, especially as your income increases and you move into higher tax levels.