Tax Reduction Strategies
You may know your federal income tax bracket. But that’s not really what you pay. In fact, the middle 20% of Americans by income pay about 13% of income in federal income taxes. But that average hides a great deal of variation: Some Americans pay nothing, and others pay more than 30%. What determines the percentage you will pay? A lot of it is based on how much you make. But you can affect your tax bill by knowing the rules, managing how you generate income, choosing what accounts you invest in, and taking advantage of potential deductions. In general, there are three strategies to consider to try to manage your federal income taxes:
Defer taxes with tax-advantaged accounts or investing strategies, such as 401(k)s, 403(b)s, IRAs, health savings accounts (HSAs), and products such as deferred annuities
Manage your tax burden by employing strategic asset location, investing in lower turnover funds, understanding mutual fund distributions, and taking advantage of charitable gifts and capital loss deductions.
Reduce taxes now with federal income tax free municipal bond income, or reduce taxes in the future with a Roth IRA or 529 college savings account.
“We all make decisions about how we save, invest, and earn income,” says Ken Hevert, senior vice president at Fidelity. “By considering the tax impact of those decisions, and adjusting your investment strategy with elements that make sense for your own circumstances and goals, you may be able to create a better financial outcome.”
Here are a few educational ideas that can help you enhance your investing strategy. These general ideas are not advice but could help you begin to construct a tax strategy.