How to Prepare Your Taxes for an Income Increase
Milford, NH Resident Expects a Big Bonus
Any significant changes to your annual income can push you to the next tax bracket. This means that the additional money received may be taxed at a higher rate. The good news is that the original income that you were anticipating throughout the year will not be taxed at a higher rate. The federal tax system in the United States is progressive, which means as your income increases only these additional portions that exceed the limits of a current tax bracket are taxed at a higher rate.
A Milford resident was expecting a large end of year bonus. Concerned how this would affect his tax bill for the entire year, he contacted the team at Merrimack Tax Associates.
Income Exceeding the Bracket Will Be Taxed at a Higher Rate
The good news is that only the income that exceeds the limitations of the current tax bracket will be taxed at a higher rate. In this scenario, the taxpayer would have no concerns over his regular paycheck. The higher taxes would primarily fall to the bonus money. Knowing that this bonus will be taxed at a higher rate, you can set aside the money for tax purposes or even send in an estimated payment if the dollar amount that will be owed is significant.
Tips for Reducing Taxes with Increased Income
While there is no way around paying taxes, you can decrease the amount of taxable income. Investing in a retirement account, college savings plan or donating some of the money to charity can help to reduce your tax bill. It also may be beneficial to file taxes separately, as opposed to as a married couple, when a large windfall of money is acquired.
In the case of the Milford resident, he was able to meet with a Merrimack Tax Associates professional. He now has a better understanding of how his money will be taxed and the best way to plan for this.