Taxpayers may be shelling out less in taxes than they think, but inevitably still more than they'd like. And if you want to cut next April's tax bill, now is the time to start strategizing.
After accounting for current progressive tax rates, deductions and credits as well as payroll taxes, average taxpayer will pay $16,582 in federal taxes for 2015, according to new data from Tax Policy Center, a joint project of think tanks The Urban Institute and Brookings Institution. That's an effective tax rate of 19.8 percent.
But accountants and financial planners say there's plenty taxpayers can do to cut their tax bill, especially with a long timeline to strategize. "This is a good point to take a snapshot of what's happened so far this year," said Tim Gagnon, an assistant teaching professor of accounting at Northeastern University's D'Amore-McKim School of Business. "It's easier to adjust over almost six months than in a few weeks at the end of the year."
First things first: Consider any big income shifts this year that could require specific planning. "You're halfway through the year, you probably have a good idea," said Gagnon. "April is a lousy time to find out there's a big bill."
A bonus, profitable home or investment sale or Roth IRA conversion, for example, could easily push someone into a higher marginal bracket. Joint filers with an adjusted gross income exceeding $250,000 could also find themselves subject to the additional 3.8 percent net investment income tax and 0.9 percent Medicare tax, said certified financial planner Mark Prendergast, director of tax strategies for Inspired Financial in Huntington Beach, Calif.
Here are some strategies to minimize what you'll pay:
Max out retirement contributions. It's an easy first resort to reduce taxable income. "This is a good time to make sure you'll hit all the limits," said Amy Wang, a senior technical manager on the American Institute of Certified Public Accountants' tax advocacy staff. For 2015, consumers can contribute up to $18,000 into a 401(k) or 403(b) plan, with an extra $6,000 in catch-up contributions possible for people are 50 and older.
Traditional IRA contributions may also be deductible, depending on your modified adjusted gross income and whether you (or your spouse) are covered by a retirement plan at work. For 2015, those contributions max out at $5,500, plus an extra $1,000 for people age 50 or older.