Basically this is what it comes down to – you may be heaving a sigh of relief that you just left tax day behind, and you could be dreaming of finally getting past the whole thing; but there’s no time like the present in planning for next year’s taxes. Maybe you were responsible all of last year, and dutifully cleaned up on every tax break you could find. While that’s wonderful, you can’t rest on your laurels; next year’s savings could be even bigger if you could make use of the head start you have now, and aim higher. If you just turned 30, and you are looking for the best way to manage your money and start a bit of income tax planning for your young family, here are some tips about how you go about it.
1. The company you work for, any business, is allowed to pay its employees $5250 tax-free every year to help them improve themselves. Whatever self-improvement you have in mind, education or anything else, the company you work for pays the bills; and yet, it’s not something that comes under “income” on your W-2. The courses of study in self-improvement that you take up don’t even have to be anything to do with your work.
2. You can achieve a good bit of saving with your income tax, planning to switch to a Roth 401(k). It could work out your way if you shifted all your retirement plan contributions to a Roth 401(k), or only a part of it. Contributing to a Roth, you aren’t granted a tax break the way you would be if it was an ordinary 401(k). No matter though, as the money you will get to withdraw from your Roth 401(k) once to retire will be completely tax-free.
3. If you happen to run a business on your own, you have your pick of retirement accounts, including the Keogh that can help you stay ahead of your taxes with a little income tax planning. You could have a simplified employee pensions plan or an individual 401(k) account as you choose. Whatever you contribute to it can be deducted off your tax bill, and your earnings keep growing tax-deferred.
4. If you get paid in stock as a kind of a bonus, you could take the opportunity to make an 83B election. It may be taking kind of the long view with your income tax planning, but it works. With this, you opt to be allowed to pay your taxes on whatever the stock is worth today rather than later. This is a great idea of course because your stocks will certainly rise in value later. Whatever gains you make with your stock later, will then qualify for better capital gains treatment. You need to make sure that you put it off no longer than a month after you get your stock options though.
5. If you have young children, here is an income tax planning tip that could be as useful as it is amusing. Sign your children on as your employees. If you have a business that isn’t incorporated, you can actually do this for a great tax advantages. Whatever you “pay” them, you move income from your account to theirs. And since they are “earning it”, they don’t have to pay taxes either – no Social Security tax or anything if they are under 18. Those earnings could also be of use as an IRA contribution.
If you think about it, some of these ideas are pretty entertaining, especially the last one. It could help take the edge off the dread one usually has planning for once tributes to the IRS each year.