Tax code is incredibly complex and changing constantly. As you consider the changes to personal situations, it is not uncommon to find people who understand little about their tax return and how to maximize planning opportunities within a tax return. One of the most beneficial strategies to lower income taxes is to maximize your income tax brackets.
Fill-up the bottom two tax brackets
The lowest two tiers of the federal income tax brackets are 10% and 12%. Depending on your filing status and taxable income, the tax rate jumps to 22% and beyond thereafter. Historically, these numbers are incredibly low and likely will increase sometime in the future. So, you want to make sure you are utilizing this space for taxable income as much as possible.
Consider Roth conversations
One way to create taxable income to maximize a tax bracket would be a Roth conversion. A Roth conversation is when money from a traditional IRA or 401(k) and converted into a Roth IRA or a Roth 401(k), thus, creating taxable income. Yes, you’re choosing to pay taxes on that money now while tax rates are historically low. However, now that money will grow tax-free in the future.
Donate at least $300 to charity
The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted last spring, includes several temporary tax changes helping charities, including the special $300 deduction designed especially for people who choose to take the standard deduction, rather than itemizing their deductions. So, even if you’re not planning on itemizing, make sure you donate at least $300 to charity before the end of the year.
If you need help maximizing your tax brackets before the end of the year, give our office a call at 320-222-4236 to schedule a no-cost meeting.