No one wants to pay more taxes than they legally have to. After all, income tax is typically the largest expense for most people.
With this in mind, the government offers tax deductions and credits to ease this financial burden. But the system seems to favor those who fall in a certain income range.
Why?
For the most part, tax services Westwood is phased out for higher-income individuals.
In some situations, higher-income means adjusted gross income $186,000 for IRA contributions or $315,000 for the new business income deductions for partnerships.
In both scenarios, taxpayers earning above these thresholds don’t qualify for the tax benefits. There are several individuals who earn higher than these amounts but fall in the middle class or who have a lot of expenses to cover.
It just doesn’t seem fair. So, tax planning exists. For further assistance hiring a CPA Westwood can really help.
Tax planning involves the analysis of a financial position from a tax perspective. The purpose of tax planning is to achieve tax efficiency. Tax efficiency ensures that you pay the least possible tax in a given situation.
Since tax brackets cause higher-income individuals to pay a higher percentage tax rate, tax planning becomes more difficult.
However, there are strategies for high-income earners. This is where forethought strategy and a little creativity comes to play.
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The Present Tax System
The current tax system takes individuals based on brackets. How tax brackets work is the higher your income, the more you pay in taxes.
The government implements a credit and deduction system designed to limit the amount of taxes you pay. As you know, the system is not necessarily designed for individuals who make over 6 figures.
While that covers the vast majority of individuals, there are still a large number of taxpayers who can’t benefit.
Yet, the top 1% of taxpayers pay roughly 40 percent of federal income taxes. The system does not seem to treat these individuals the same. The effects of the tax disparity are people committing tax evasion.
If you don’t want to fall into any trouble connecting with the best CPA Westwood is the right thing to do.
Tax evasion is the illegal underpayment of tax. By no means should you commit tax evasion? Those found guilty are imprisoned for up to 5 years.
The tax services Westwood is important for high-income earners. There are several legal ways to minimize tax.
if you make a high salary, there are some tax strategies for high-income earners that will help you save thousands or more on the taxes.
Retirement Accounts
There’s no doubt that everyone should be planning retirement to help in tax services Westwood. Besides the fact you want a comfortable retirement, investing in certain types of retirement accounts is one of the best strategies for high-income earners.
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Individual Retirement Accounts (IRA)
Back Door Roth IRAs
Traditional IRAs don’t offer any tax-deductible benefits for those with a Modified Adjusted Gross Income (MAGI) of above $72,000 and earnings are just tax-deferred.
However, Roth IRAs allow you to contribute after-tax dollars while earnings and withdrawals are tax-free. But there’s a catch
If you have an MAGI of above $120,000, you aren’t able to contribute to a Roth IRA. Unless, you convert your non-deductible contribution from the traditional IRA, also known as backdoor Roth IRA.
Simple IRA
If you are self-employed and have employees, consider setting up a Simple IRA. They are less costly for the business with a slightly lower contribution limit of $12,500 annually.
Other Tax Saving Retirement Accounts
There are other types of self-employed retirement accounts you must know about for tax services Westwood, which allow you to make higher tax-deferred contributions.
As much as $60,000 if you are over the age of 50. Also, $54,000 for those younger than 50.
Health Savings Accounts
Do you qualify for a Health Savings Account (HSA)? If so, you definitely want to max out your contribution limit.
HSAs are a wat to save pre-tax income into a specific account and withdraw the funds for medical purposes.
By putting pre-tax money aside, you lower the taxable income and pay in taxes. Then when funds are withdrawn from the HSA, it becomes tax-free.
If you want to know how to take advantage of the HSAs, hiring CPA Westwood helps a lot. Do you know distributions become tax-free? As if they were used on health-related expenses.
The catch is the healthcare-related expenses you’ve been paying out of pocket have to be greater than or equal to your HSA distribution. So, you would need to keep up with the receipts to validate your distribution.
Stock Donation
Your charitable donations are not just limited to cash only. Many wealthy individuals find it advantageous to donate, here’s why.
When the stock of appreciated value is donated, the owner doesn’t pay any capital gains tax. In fact, they are able to deduct the full market value, also known as an appreciated value, not the price you paid.
This tax services Westwood strategy works best for stocks that have increased in value since you bought them.
Factors To Consider When Tax Planning
Paying tax later is better than paying now
This is known as tax deferral or deferring tax. If tac can be deferred for a later time, that’s better for you as the taxpayer.
But how when you potentially might end up paying some amount later?
Well, the tax you deferred could potentially be invested until it’s time to pay or you might end up being in a lower tax bracket later.
Also, situations change and you could find some more incentives are available or may incur losses to offset any income later.
Either way, tax deferring provides you with flexibility. If and when legally possible, you must defer your taxes.
Don’t spend a dollar to save 30 cents in taxes
This rule is usually geared towards business owners but can actually apply to anyone. Near the end of the year, taxpayers try their best to find ways to reduce the taxable income by spending more.
Spending more to reduce taxable income is not tax planning. Hiring CPA Westwood can help you plan it right.
A strategy like this makes sense if you purchase items you were planning on purchasing, regardless of the tax plan.
Finally, for the most part, everyone pays tax. Whether you work full-time or part-time at any level, the IRS expects you to pay taxes.
It’s unlikely they’ll inform you that you overpaid or miss out on applicable tax incentives, which is why tax services Westwood is so important for all.
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