How to get to a lower tax bracket?

how to lower your tax bracket

As I'm getting older I'm seeing the ways of tax shelters and for this year I'd like to be within the 15% tax bracket. I'm married filing joint. The 15% tax bracket is capped at $68,000. Let's say that our gross combined income is $85,000. If we contribute $10,000 to pre-tax 401k's and. show more As I'm getting older I'm seeing the ways of tax shelters and for this year I'd like to be within the 15% tax bracket.

Answers

Best Answer: If your gross combined income is $85k you're still in the 15% tax bracket:

Gross income: $85,000

- Standard deduction: $11,400

- Personal exemptions: $7,300

= Taxable income: $66,300

If your only goal is to stay in the 15% bracket you need do nothing at all. But that's not a very good overall strategy.

Roths won't reduce your taxable income. They are not deductible. The benefit of a Roth is that the earnings are forever tax-free once you are eligible to make distributions. Traditional IRAs and 401(k)s give you a tax break today but the distributions are taxed when you pull the money out. The Roth is the FAR better deal in the long term. You pay a known amount of tax today and can forever thumb your nose at the Tax Man regardless of what happens to income tax rates.

Crank $200k into Roths over your working lifetime and grow it to $2 million and you'll have paid tax on $200k. Do that with a Traditional IRA and you'll save the tax on the

$200k but pay tax on the $2,000,000. On top of that, Roths carry no required minimum distribution at any time and can be passed on to heirs without their having to pay tax on the funds either. A Traditional IRA requires you to make distributions once you turn age 70 1/2 and pay the tax even if you don't need the money. And what you pass to your heirs is taxable income to them when they pull the money out.

For maximum long-term benefit, I'd suggest that you kick in enough into your 401(k)s to get the maximum employer match as that's FREE MONEY to you. Then focus the rest of your retirement savings in Roth type plans. The long-term benefits of this strategy can make the difference between an adequate retirement and a luxurious one. Either way though, at least you won't be eating Alpo as some short-sighted folks sadly will.

Keep one other item in mind. You can't do much about tax rates, but as long as they are below 100% you will ALWAYS come out ahead by generating as much taxable income as possible. Even if you're sitting right on the bracket, an extra $10k in income still nets you $7,500 after income taxes are covered. (OK, FICA and state income taxes could reduce that but you'll still be money ahead regardless.) Don't get short-sighted on taxes. Look at the big picture of after-tax income. Guys like Bill Gates shell out 8 and 9 figures in income taxes every year but look at their net worths! That's what REALLY matters!

Source: answers.yahoo.com

Category: Taxes

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