Many Americans are unhappy with the rate of tax they face each year, particularly during tax season when the tax rate is most apparent. In fact, a recent article by the Wall Street Journal reported on a Gallup poll that found nearly 57 percent of Americans believe their income taxes are too high. With many reporting dissatisfaction with both income tax rates and payroll taxes.
Our work at Idaho Medical Association Financial Services provides ways to effectively reduce and manage client’s tax burdens. The first step is working with your financial adviser to create a year-round tax plan. By continually monitoring financial activity throughout the year, and the resulting tax effects, clients can take steps to lower their tax burdens.
According to Bloomberg News, the average American makes $50,000 per year and is taxed at a rate of 25%. For many clients at Idaho Medical Association Financial Services the average income and tax rate is significantly higher than this rate. The same article produced the useful chart below to show average tax rates across income levels taken from 2013 IRS data. From the data below, it’s easy to see that the top 5%, 1%, and .01% of earners paid the highest Federal Tax rates in 2013.
Most high income earners face a 39.6% tax rate yearly. This rate may be significantly reduced with strategic tax planning initiatives. Relating to the current financial landscape, the election of Donald Trump may mean standard tax rates for the wealthiest of Americans will decrease as the President-elect has claimed to cut tax rates for the top earners. Regardless, utilizing tools to lower tax burdens can make a significant impact in one’s financial health.
Take Advantage of Retirement Savings Accounts
Retirement savings plans like 401(k), 403(b), and IRA accounts are arguably the most important tool in both creating financial health for retirement and lowering tax burdens. Most contributions to these plans reduce taxable income and grow tax-free until retirement (with the exception of Roth IRA’s which provide tax breaks at withdrawal instead of contribution). Be sure to contribute as much as possible to max out these accounts.
Utilizing Health Savings Accounts
A Health Savings Account (HSA) is a tool accessible to individuals enrolled in high-deductible health plans that allows users to contribute to the account tax-free. Withdrawals may be used to pay for qualified medical expenses tax free. If funds are not used each year, the amount can roll over and be used in subsequent years. If the funds are used for anything other than medical expenses, the withdrawal amount will be taxed as additional income.
Donations and Deductions
Donations are a common way to cut taxes on taxable income. Contributions to qualified 501(c)(3) nonprofit organizations are deductible from taxes. Other notable deductions that may reduce taxable income are available for self-employed individuals (either full-time or part-time). Many of our clients own their own medical practices or have side businesses. Relevant deductions available include: business-related vehicle mileage, shipping, advertising, website fees, percent of home internet charges used for business, professional publications, dues, memberships, business-related travel, office supplies and any expenses incurred to run your business.
Contributions to Trusts
Contributions to trusts are often a smart way to decrease taxable income. Trusts are typically established as a beneficiary account, typically for family members of the person who sets up the trust. Contributions to trusts effectively lower the taxable income of the donor. And, contributions to a trust can be used as a way to decreases taxes seen through alternate actions like gift or estate taxes for heirs. However, it’s important to note that trusts themselves are highly taxed. Be sure to speak with one of our financial advisors about the possibility of financial opportunities through trusts.
These are only a few strategies that we at Idaho Medical Association Financial Services may be able to help clients implement to lower their tax burdens and boost their financial health. Understanding your financial health through continual tax planning is a beneficial tool we offer at our firm. We thoroughly analyze our clients’ tax returns every year to search for additional ways to reduce taxes. To evaluate your current financial health, please contact an IMAFS financial representative today.
Idaho Medical Association Financial Services is a financial and wealth management firm specializing in personalized financial guidance to medical professionals. Areas of speciality range from investment planning and retirement analysis to in-depth services such as tax analysis and strategies, insurance and estate planning and financial planning. For a free financial consultation, please call: (208) 336-9066 or email firstname.lastname@example.org.