Strategies to Protect Your Income From Taxes
As a taxpayer, your income is taxed at several levels, and your earned income is subject to additional levies to fund Social Security and Medicare. Although taxes are difficult to avoid, there are several strategies that can help you better protect some of your income from being taxed. The the professionals at Frisco Bookkeeping and Tax Services are proud to share one of these strategies.
Max out retirement accounts and employee benefits
In both 2020 and 2021, taxable income can be reduced for contributions for amounts made to a 401(k) or 403(b) plans up to $19,500. If you are 50 or older, you may add $6,500 to the basic workplace retirement plan contribution. For example, an employee earning $100,000 in 2020 or 2021 who contributes $19,500 to a 401(k) reduces taxable income to $80,500.
No retirement plan at work?
For those who don’t have a retirement plan at work, you can get a tax break by contributing up to $6,000 (or $7,000 for those 50 and older) to a traditional IRA in 2020 and 2021. Taxpayers who do have workplace retirement plans (or whose spouses do) may be able to deduct some or all of their traditional IRA contribution from taxable income, depending on their income. The deduction is phased out for adjusted gross incomes at different levels (higher in 2021 than in 2020) depending on whether the deduction is claimed on a single taxpayer’s return, joint return, or a married individual filing separately.
Employers' fringe plans
In addition, employers may offer a variety of fringe plans that enable their employees to exclude from their income contributions made or benefits received under these plans. Benefits under these programs generally are reflected as non-taxed amounts on an employee's W-2 statement. These benefits include, flexible spending accounts, educational assistance programs, adoption expense reimbursements, transportation cost reimbursements, group-term life insurance up to $50,000, and generally for senior managers and executives, deferred compensation arrangements
Please contact us
If you have any questions or concerns with regard to this deduction, or for any other reason or concern, please feel free to contact us at (972) 885-0156. Frisco Bookkeeping and Tax Services offers a variety of services for individuals and small-to-large companies. Our firm, which boasts more than 18 years of successful, timely and reliable assistance, offers setup and training of QuickBooks®, QuickBooks® Pro Advisor, Online QuickBooks® and Online Cloud. We also provide bookkeeping and payroll services, as well as income tax preparation for individuals and businesses.