Hi, I’m Bette Hochberger, CPA, CGMA. Deferring income taxes can be a smart financial strategy that allows you to keep more of your hard-earned money working for you. By postponing tax payments to a future date, you can potentially lower your tax burden and improve your cash flow. Today, I’ll go over some effective methods to defer income taxes, helping you make informed decisions for your financial future.
Utilize Retirement Accounts
One of the most common ways to defer income taxes is through retirement accounts like 401(k)s and Traditional IRAs. Contributions to these accounts are typically made with pre-tax dollars, meaning you won’t pay taxes on the money until you withdraw it in retirement. This approach not only reduces your taxable income for the current year but also allows your investments to grow tax-deferred until you start taking distributions.
Take Advantage of Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) offer a unique way to defer income taxes while saving for medical expenses. Contributions to HSAs are tax-deductible, and the funds grow tax-free. Additionally, withdrawals for qualified medical expenses are also tax-free. By maximizing contributions to an HSA, you can effectively reduce your taxable income while preparing for future healthcare costs.
Invest in 1031 Exchange Properties
For real estate investors, a 1031 exchange allows you to defer capital gains taxes on the sale of investment properties. By reinvesting the proceeds from the sale into a similar property, you can defer taxes on the gain until you eventually sell the new property. This strategy can be a powerful tool for building wealth through real estate while minimizing tax liabilities.
Defer Income Through Business Structures
If you’re a business owner, consider the benefits of structuring your business to defer income taxes. For example, S Corporations and Limited Liability Companies (LLCs) can allow for pass-through taxation, which means income is only taxed at the individual level rather than at the corporate level. By controlling the timing of when you take distributions, you can manage your taxable income more effectively.
Use Tax-Loss Harvesting
Tax-loss harvesting is a strategy that involves selling investments at a loss to offset capital gains from other investments. By strategically timing the sale of underperforming assets, you can reduce your taxable income for the year. This approach allows you to defer taxes on your gains while also potentially improving your overall investment portfolio.
Consider Deferred Compensation Plans
For high-income earners, deferred compensation plans can be an effective way to delay income taxes. These plans allow employees to defer a portion of their salary until a later date, typically retirement. By doing so, you lower your taxable income in the current year and potentially pay taxes at a lower rate when you eventually withdraw the funds.
Explore Charitable Contributions
Making charitable contributions can provide tax benefits, especially if you donate appreciated assets. By donating stocks or other assets that have increased in value, you can avoid paying capital gains taxes while also receiving a charitable deduction for the fair market value of the asset. This strategy not only helps you defer taxes but also supports causes you care about.
Deferring income taxes can be great to enhance your financial situation and maximize your investment potential. With the right strategies in place, you can take control of your tax planning and work towards a more secure financial future.
As always, stay safe, and I’ll see you next time.
