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Tax Relief 101: Postpone Extra Income If You Can
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This is an old tax tip I was surprised I hadn’t mentioned before but it involves postponing any extra income that you anticipate you’ll get, if you can, until January 1st of next year. By pushing it off until then, you can wait until you file for taxes the following year (April 15th, 2008) before you’ll have to pay taxes on that income.
This works the best if you have some self-employment income, as little as it may be. Try to push off receipt of that income until January and you won’t have to pay taxes on them until next year. If you don’t have any self-employment income but you do anticipate a Holiday bonus of some kind, ask if you can take that in January.
If you can push off $1,000 in income (and assuming you’re in the 25% tax bracket), you’ll have an extra $250 to play with next year. Enjoy!
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Doesn’t that simply mean you will have additional $250 in taxes the following year after the year in which you “play” with the apparent $250 gain? And if you are not really wise “playing” with the money, it’s going to be hard to shell it out during the next tax period.
I won’t see it as a “relief”…you are just delaying the pain by one year.
A year is a long time…
This is especially good advice if you’re near one of the “phaseout levels” where one’s ability to do various things ends. An example is funding Roth IRAs, which phase out after $150K MAGI (Modified Adjusted Gross Income) for married filing jointly.
A good thing to do in December is to figure out what your MAGI will likely be; it should be fairly easy since the MAGI doesn’t depend on itemized deductions. If your MAGI is close to a magic income phaseout that you care about, work to get some income deferred, or pump more cash into a 401K if you can (401K decrease your MAGI).
On the flip side of the equation, my fiancee and I are trying rather hard to complete the sale of her old house before the end of the year. (We’ve already found a buyer, but the closing date is still up in the air.) The reason is that, due to the near-collapse of the real estate market where she used to live, we’ll be taking a $30,000 loss on the house…and if the sale is completed before the new year, we’ll be able to write that off 2006′s income, which will make up for the fact that my Schedule C expenses were way less than usual this year, owing to the whole falling-in-love-and-moving-in-together thing preventing me from spending quite as much time jetitng around the world trying to drum up business.