Specific Benefits To Knowing And Understanding Your Income Tax Bracket

By Author: Jeff Parrack
Total Articles: 4762
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The federal and state tax code offer a mind-boggling number and variety of credits, deductions, exemptions and other types of benefits, many of which change from year to year. What's more, they change differently among different tax brackets, which are the ranges of income subject to different tax rates and adjustments. Some benefits kick in at higher levels, while others decrease as your income rises "too high" to take advantage of them. Therefore, knowing and understanding your income tax bracket is one of the first things you need to do if you are going to successfully reduce your taxes.

The term "too high," of course, simply means that your income has passed an arbitrary limit that the IRS or your state agency has set. Limits vary according to the rules being considered. For one example, up to $25,000 of real estate rental losses are deductible against other income, which can be a serious benefit and net you a few thousand dollars each year. However, when income exceeds $100,000, the $25,000 maximum begins phasing out and is completely gone once your earnings exceed $150,000.

Clearly, knowing about your tax ...
... bracket, and what benefits both show and drop out as you move among brackets, is extremely important. Your plan for increasing your income has to be developed in accordance with the realities of the tax code, but it is still possible to work within the system, legally and ethically, and set things up in such a way as to eliminate the negative impact of these income limits.

The kids can help you

If you have both minor children and your own business, then you can put the two of them together for a real, measurable benefit. When you hire the kids, you can reduce your business income, thus reducing your taxable (adjusted) income. By changing the bracket you are in, you can avail yourself of the benefits and opportunities otherwise off limits because your income is (here it comes again) "too high."

With this strategy you can also use the childrens' lower rates. Each child can earn up to $5,700 in 2009 and be on the hook for exactly "zero" income tax. This income shift not only reduces your own taxable income, it places that income into what is a 0% bracket. Depending on the legal structure of your business, there may be payroll taxes, but even if there are you are looking at a 15.3% rate for those, which will likely be less than your normal tax bracket rate, in any case. With two kids, this single strategy saves you $11,400 in taxes for 2009.

A "C" corporation is a "person," too

If you move to a "C" corporation structure, you are establishing another "legal entity" as a discrete, individual "taxpayer." Shifting income, this time to the "C" corporation, will once again reduce your own taxable income, which continues your move to a lower bracket with its lower rates and other positive benefits. One of the best things that happens is that you realize additional tax savings. The "C" corporation's tax rate will be lower, starting as it does with an initial one of just 15%.

Assuming your rate is higher than that, which is not an unsafe assumption, this means that you are not merely reducing the taxable income figure, you are actually moving your income to a lower tax rate. This is where your additional savings come in. However, we are talking "benefits" in general, not just as regards the tax liability, and monies in your "C" corporation can pay for certain employee benefits available within that specific corporate structure. These changes, which you know to institute because you understand how your bracket affects your return, can result in thousands of dollars of savings annually.

Other approaches

Sometimes, your income will be just slightly over a certain point at which some (or many) tax benefits are eliminated. Sometimes you can resolve this problem by using what's called the "bunching strategy," where you combine income and expenses so that your net will alternate between low and high each year. With this strategy, you can at least give yourself an opportunity to lower your bracket to take advantage of the tax benefits every second year, which is better than not at all.

The fact is, simple tax planning can save you a lot of money, regardless of your bracket, income, assets or business. Tax planning can be approached and applied in many different ways, and there is always a way, no matter what your specific situation, to reduce taxable income while making the same amount of (or even more) money. It is never too early to start your tax planning, and getting it moving "now" is advisable, no matter when "now" happens to be.
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