The best way to begin planning what options you have to lower your income tax burden is to determine where you are, or where you will be at the end of the year, tax wise. In other words, start your tax plan by projecting what your taxable income will be by year’s end if you continue on your current path without making any tax planning moves. In most cases your projected taxable income won’t be exact, but this late in the year you should be able to get a reliable estimate.
What is taxable income? Look at last years income tax return. For individuals, 2009’s taxable income can be found on page 2, line 43 of your Form 1040. If you look at the design of the Form 1040, you will see that to calculate taxable income you begin with gross income, subtract adjustments to gross income (e.g. traditional IRA contributions); subtract the higher of your itemized deductions or the standard deduction; and finally you subtract your exemptions. (It’s simple math, right? It is just the rules of what is “taxable” income and “taxable” deductions that are complex.) Once you have projected your taxable income for 2010, look at the tax rate schedules to determine your incremental tax bracket.
Once you have determined your incremental tax bracket, you are able to ask yourself and answer questions such as “if I give the church an additional $1,000 this year, how much will it really cost me?”. If you are in a 25% federal income tax bracket, your after tax cost, if you can itemize deductions, would be $750 rather than $1,000. And we are ignoring the additional tax savings potential on a state income tax return. In Arkansas this contribution would generally give you another 7% in tax savings.
Another benefit of projecting your taxable income? You can determine an accurate estimate of your 2010 income tax so you know whether you will get a refund or owe income taxes in April 2011. If you are unfortunate enough to owe additional income tax and lack cash to pay them, you will have plenty of time to prepare for April 15th rather than have an unpleasant surprise at the last moment. Of course your primary objective is to achieve the lowest possible income tax possible. Depending on your income tax situation, it might be wise for you to ask for professional help. There are many nuances to consider in achieving the best possible tax position. Planning your income taxes BEFORE December 31 is where a CPA can really earn his fee and save his client money. If you need help call me. 1-479-648-2846.
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