End of the Year Tips: Defer Income

Ah, the end of the year. Time to reflect on the past year and prepare for the next year. And there’s no better way to prepare for the coming year than by making the right financial adjustments to lower your annual tax bill! Deferring income is one such tax strategy that can lower your annual tax liability.

Making adjustments in income can make a great difference in bringing down your tax liability. For 2017, taxes on income are charged at the considerable rate of 28% for income groups $91,900 – $191,650, and 35% for income groups $416,700 – $418,400. Only taxpayers who expect their tax bracket to remain the same or drop to a lower bracket should defer income. If you expect your income bracket to rise, you may be able to advance the receipt of income to 2018 to pay taxes in the lower bracket.

Defer Income

Income is taxed in the year in which it is received. If you are due a bonus or a payment this month, you can postpone receiving it in 2018 to avoid paying taxes on it this year.

If you are an employee, you have certain restrictions when it comes to deferring income. You can’t exactly postpone the receipt of your paycheck. However, if you have income from other sources that you can postpone, you may consider deferring that income to early next year.

If you are self-employed, or a freelancer or consultant, you have more room to maneuver. If you fall into one of these categories, delaying billing until 2018 is a smart way to lower income tax.

Are you planning to sell any assets? You can avoid paying tax on capital gains by deferring the sale or the receiving of capital gains to next year.

Do you have an IRA that charges taxes at the time of withdrawal? You may also take distributions from that IRA at the beginning of the next year rather than this year. Those who save in a Roth IRA can withdraw anytime without having to pay taxes at the time of withdrawal. However, those with a traditional IRA can avoid paying income tax on a withdrawal if they hold off until 2018.

Defer Deductions

If you expect your income to increase next year, you may defer your deductions. You can postpone paying bills for expenses such as medical costs, property tax, and charitable contributions. Consider all your expenses that are tax deductible that has also not yet been paid.

Small adjustments eventually lead to big savings. By using tax strategies such as deferring income, you can pay less in taxes to the IRS each year. Contact our experienced tax professionals for more assistance with optimizing your tax savings.