16 Jun Proactive Tax Planning
Challenge:
Want to Understand your Taxes and be Proactive?
Solution:
Follow these Proactive Tax Planning Tactics
Steps to take:
Understanding your Marginal Tax Brackets:
Not all of your income is taxed at the same rate. The U.S. tax system is progressive, meaning after you reach certain income thresholds, each additional dollar you earn is taxed at a higher rate. Understanding your marginal tax bracket allows you to implement certain proactive tax planning strategies which can lower your long-term tax liability. Speak to a fee-only fiduciary advisor at Endowment Wealth Management for a free analysis of your taxes and learn how much you may be able to save on taxes through proactive planning!
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Lowering Your Taxable Income:
There are certain accounts you can contribute to which lower your taxable income. Some examples are:
– Traditional 401(k)
– Deductible IRA
– Health Savings Account (HSA)
Contributing to these types of accounts is most beneficial when you are in a high marginal tax bracket and are wanting to defer paying taxes until you are in a lower marginal tax bracket (i.e. retirement).
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Taking Advantage of Low Marginal Tax Brackets:
If you are in a low marginal tax bracket and expect to eventually be in a higher tax bracket, paying taxes on your contributions now will result in tax-free growth for the remainder of your life! A couple strategies are:
– After-Tax Contributions (Roth 401(k) & Roth IRA)
– Roth Conversions
– Long-term Capital Gains Rates
Contributing to a Roth IRA or Roth 401(k) means you elect to pay the tax when you initially contribute to the account, then are never subject to paying taxes on those funds again!
If you have existing pre-tax account dollars, it might make sense to convert them to after-tax (Roth) while you are in a lower marginal tax bracket and take advantage of tax-free growth!
If you are in the 12% marginal tax bracket, you can pay 0% tax on your long-term capital gains!
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