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2014 tax planning starts with your tax bracket

Tax planning is the art of arranging your affairs in ways that postpone or avoid taxes. By employing effective tax planning strategies, you can have more money to save and invest or more money to spend.

The 2013 tax year is finally over. That means it’s time to turn your tax thoughts to moves you can make to reduce your 2014 tax bill.

A good starting point for any tax planning is with the basics, such as knowing what your tax bill likely will be.


While there are a lot of variables that come into play, you can get a general idea by checking out the annual tax brackets.

We’re still waiting for Congress to finalize many 2014 tax laws, but the seven ordinary income tax rates are the same, starting at 10 percent and topping out at 39.6 percent.

And the Internal Revenue Service’s inflation adjustments last fall told us what income ranges will be taxed at those various rates.

So you don’t have to go searching, here they are in the table below.

Tax Rate Single  Head of Household Married Filing Jointly
or Surviving Spouse
Married Filing Separately
10%  Up to $9,075   Up to $12,950   Up to $18,150   Up to $9,075
15%  $9,076
to $36,900
to $49,400
to $73,800
to $36,900
25%  $36,901
to $89,350
to $127,550
to $148,850
to $74,425
28%  $89,351
to $186,350
to $206,600
to $226,850
to $113,425
33%  $186,351
to $405,100
to $405,100
to $405,100
to $202,550
35%  $405,101
to $406,750
to $432,200
to $457,600
to $228,800
39.6%  $406,751 or more   $432,201 or more   $457,601 or more   $228,801 or more

Print this out or simply bookmark this page. It will come in handy as you start focusing more intently on your 2014 taxes.

Progressive taxes: Remember, even if your annual salary falls in the 39.6 percent bracket, you don’t pay that rate on every dollar you earn.

The U.S. tax system is progressive. That means you pay the top rate, or whatever bracket your income tops out at, on the last dollar you earn. The rest of your money is taxed at the lesser rates leading up to your top tax bracket.

So every taxpayer pays 10 percent on the first $9,075 of taxable income that he or she receives. That’s $907.50. Then we pay the 15 percent rate on our earnings that fall into that tax bracket and so on, until all our money is taxed at the proper rate.

These tax calculations mean that while your income may be in the 39.6 bracket, your effective tax rate will be less.

More money, more taxes: Of course, wealthier taxpayers also have to worry about some added taxes.

There’s the 3.8 percent Net Investment Income Tax, or NIIT, as well as the additional 0.9 percent Medicare payroll tax on top of the 1.45 all of us already have withheld from our paychecks.

These added taxes on the rich kick in if you make more than $200,000 as a single filer or $250,000 as a married couple filing jointly.

All these considerations are why it’s better to start thinking about your 2014 taxes now, instead of next April. There’s still plenty of time to take the appropriate tax actions that could lower the amount you’ll owe Uncle Sam this year.


Want to read more on tax planning? – Why tax planning is so important


What tax planning really means

Tax planning is the art of arranging your affairs in ways that postpone or avoid taxes. By employing effective tax planning strategies, you can have more money to save and invest or more money to spend. Or both. Your choice.

Put another way, tax planning means deferring and flat out avoiding taxes by taking advantage of beneficial tax-law provisions, increasing and accelerating tax deductions and tax credits, and generally making maximum use of all applicable breaks available under our beloved Internal Revenue Code.

While the federal income tax rules are now more complicated than ever, the benefits of good tax planning are arguably more valuable than ever before.

Of course, you should not change your financial behavior solely to avoid taxes. Truly effective tax planning strategies are those that permit you to do what you want while reducing tax bills along the way.

How are tax planning and financial planning connected?

Financial planning is the art of implementing strategies that help you reach your financial goals, be they short-term or long-term. That sounds pretty simple. However, if the actual execution was simple, there would be a lot more rich folks.

Tax planning and financial planning are closely linked, because taxes are such a large expense item as you go through life. If you become really successful, taxes will probably be your single biggest expense over the long haul. So planning to reduce taxes is a critically important piece of the overall financial planning process.

Over the years as a tax pro, I have been amazed at how many people fail to get the message about tax planning until they commit a grievous blunder that costs them a bundle in otherwise avoidable taxes. Then they finally get it. The trick is to make sure you don’t have to learn this lesson the hard way. To illustrate the point, consider the following example.

Example: Josephine is a 45-year-old unmarried professional person. She considers herself to be financially astute. However, she is not well-versed on taxes. One day, Josephine meets Joe, and they quickly decide to get married. Caught up in the excitement of a whole new life, Josephine impulsively sells her home shortly before the marriage. The property is in a great area and has appreciated by $500,000 since she bought it 15 years ago. She intends to move into Joe’s home, which is a dump, but Josephine is a proven genius at remodeling, and she plans to work her usual magic on Joe’s property.

Result without tax planning: For federal income tax purposes, Josephine has a whopping $250,000 gain on the sale of her home ($500,000 profit minus the $250,000 home sale gain exclusion allowed to unmarried sellers).

Result with tax planning: If Josephine had instead kept her home and lived there with Joe for two years before selling, she could have taken advantage of the larger $500,000 home sale gain exclusion available to married joint-filers and thereby permanently avoided $250,000 of taxable gain. If necessary, Joe’s home could have been sold instead of Josephine’s. Alternatively, Joe’s property could have been retained, and the couple could have worked on remodeling it while still living in Josephine’s home for the requisite two years.

Moral of the story? By selling her home without considering the tax-smart alternative, Josephine cost herself $62,500 in taxes (completely avoidable $250,000 gain taxed at an assumed combined federal and state rate of 25%). This is a permanent difference, not just a timing difference. The point is, you cannot ignore taxes. If you do, bad things can happen, even with a seemingly intelligent transaction.

The last word

There are many other ways to commit expensive tax blunders. Like selling appreciated securities too soon when hanging on for just a little longer would have resulted in lower-taxed long-term capital gains instead of higher-taxed short-term gains; taking retirement account withdrawals before age 59½ and getting hit with the 10% premature withdrawal penalty tax; or failing to arrange for payments to an ex-spouse to qualify as deductible alimony; the list goes on and on.

The cure is to plan transactions with taxes in mind and avoid making impulsive moves. Seeking professional tax advice before pulling the trigger on significant transactions is usually money well spent.

Give us a call for your next tax planning consultation! Contact Us

David G. Denkhaus & Company, PLLC – (810) 487-4554

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