Tax Day Will Be Here Before You Know It
Tax Day is April 18th this year, due to the Emancipation Day holiday in Washington D.C. on the 15th. This is a good time of year to review your finances and think about your long-term tax strategy. Tax Day will be here before you know it, so know these important tax terms and start thinking about how you’ll work to lower your tax bill.
A tax credit is a dollar-for-dollar benefit. It’s an amount that taxpayers can subtract directly from their tax bill. Some examples are the child tax credit and the earned income tax credit for low-to-moderate-income taxpayers.
While a tax credit can decrease your tax bill, a tax deduction decreases your taxable income. For instance, a tax deduction is worth your highest marginal tax bracket, for instance, 28 cents on the dollar if you are in that marginal tax bracket. So, if you spent $100 on a tax-deductible item, you would get $28 back. Some common deductions for taxpayers who itemize are the charitable donation deduction, the mortgage interest deduction, and the home office deduction.
Tax deferrals are what you see with a 401(k) or IRA, where you pay taxes at a later date. There are other ways to achieve tax deferral, such as an annuity. While deferring your taxes can be helpful, it can also potentially mean a big tax bill later on. For example, starting at age 72, you will most likely have to start taking Required Minimum Distributions (RMDs) from your tax-deferred retirement accounts, which could mean a bigger tax burden.
Why You Need a Tax Minimization Plan in Retirement
Don’t forget about your tax bill – taxes could be one of your biggest expenses in retirement, even if you’re not earning a paycheck. Depending on your income, everything from your Social Security benefit to your investment gains to your retirement account distributions can be taxed. Have a plan for minimizing your tax burden in retirement, especially if you have a tax-deferred retirement account. There may be strategies you could use, 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. The right strategy depends on your unique situation, income, and assets, so there’s no simple one-size-fits-all solution.
We can help you create a plan tailored specifically to you. Click HERE to schedule your complimentary financial info session where you can learn about us, and we can learn about you. Everyone has a different vision for their retirement, different income levels to support it, and everyone has unique tax situations. At Barnett Financial and Tax we can help you create a tax minimization strategy as part of your overall retirement plan.