As the tax deadline approaches, you would want to cut down the bill as much as you can. But you will probably feel that it is too late to save up on taxes because you would have already earned almost all the income for the year and expenses would have been incurred as well. Obviously, you will have to pay tax on that income and the possibility of getting deductions for expenses will be limited at this point in time. The good news is that there are still last-minute measures that you can implement to cut down your tax bills. The chances are even greater if you run a business. Let us share some smart tax-cutting moves with you.
Defer income into the next year
Deferring your current year’s income into the next one is a good move if you want to reduce the taxable income for the current year and delay paying taxes on it. For instance, a salaried employee can request the employer to push the year-end bonus payment into the next one. Similarly, a business owner can ask a client to defer a major payment into the subsequent year. However, you need to be careful with this strategy because deferred income in the current year may put you in a higher tax bracket in the subsequent year. Further, you will have to bear in mind that the current tax savings will be offset by the taxes to be paid in the future.
Make an IRA contribution
Consider taking advantage of an IRA contribution because it is tax-deductible in the year you make it. Still, different IRS rules apply to IRA contributions, depending on individual situations. For example, you can claim a deduction for the full amount of the contribution if you and your spouse are not covered by any retirement plans at work. On the other hand, it may be limited on the basis of your adjusted gross income if you and your spouse have retirement plan coverage. If you plan to use this measure, make sure that you understand the rules that would be applicable in your case.
Check if you are eligible for any credits
Another idea to limit your tax bill at the last moment is by finding out if you are eligible for any credits and claiming them in that case. Your eligibility depends on factors such as your marital status, income, and the number of children you have. These rules can get a little complex and you wouldn’t want to have any disputes later, so it makes sense to work with a knowledgeable tax attorney who knows the law inside out. Credit is basically a dollar-for-dollar reduction in the actual, which makes it better than a deduction. The latter reduces the income that gets taxed, while a credit cuts down the tax bill itself and can even push it below zero and get you a refund.
For business owners, there is a possibility of cutting down your tax bill by taking certain legitimate deductions for a variety of business-related expenses. Bunching these expenses is a smart idea if you want to reduce the taxes for the current year. This can be easily done by implementing some smart strategies such as paying employee bonuses and buying major business assets at year-end instead of the beginning. You may consider prepaying expenses for supplies or making bulk purchases to get a deduction for them in the same year.
Take capital losses
Taxpayers who happen to lose money on capital investment (like stock) in a specific year can actually leverage this loss to reduce their tax bill for that year. But you will have to realize a loss by selling the stock at a loss in the first place to take the capital loss. After realizing the loss, it can be used to offset any realized capital gains in the year, thus cutting down the bill to some extent. However, you cannot take the IRS for a ride as they will disallow your loss in the case of a wash sale. Essentially, a wash sale happens when you buy the same investment (or an identical one) within thirty days before or after taking a loss. Cutting your tax bill is not rocket science provided that you are smart enough and have the right guidance from an expert. Moreover, you can do it even at the last moment with these simple yet intelligent moves. But make sure that you do it in a legitimate way because getting in trouble with the authorities is the last thing you would want to happen.