Tax planning is used to analyze your tax situation and minimize your tax liability. There are many ways this can be done. Here are a few of the most common.
Contributing to a Traditional IRA. An individual may contribute up to $6,000 ($7,000 if age 50 or older) to a Traditional IRA. For married couples, the amount is doubled. This contribution amount directly reduces adjusted gross income. The contribution amount is invested and grows tax-deferred until retirement.
401(k) plans. These plans are popular with larger companies and offer a way to defer income from an employee’s paycheck into the company’s 401(k) plan. These plans vary, but an individual can defer up to $19,500 ($26,000 if age 50 or older) of income per year. This is an effective way to reduce adjusted gross income and defer taxes until retirement.
Offsetting capital gains with capital losses. If stocks or investments are sold for a profit, then capital gains must be paid. Any losses can be used to offset capital gains in future years. A maximum of $3,000 capital loss can be taken each year to reduce income.