Contributed by Idea Collective Member:
Founder of the Idea Collective Small Business Community
We sat down with Arthur Lee, founder of Alliance Tax in Wisconsin, to break down the key updates and delve into the world of effective tax rates and proactive tax planning.
Effective January 2024, the IRS has expanded tax brackets, allowing for potential savings. Arthur Lee explained that for married filing joint individuals, the 10%, 12%, and 22% tax brackets have seen increases of $11,000, $18,000, and $22,000 respectively. This means you can earn more while staying within the same tax bracket.
While tax brackets indicate the percentage you’ll pay on a certain income, the real game-changer is your effective tax rate. Tax planning should focus on this rate, which considers deductions and credits. It’s not about what bracket you’re in; it’s about minimizing what you actually pay.
According to Arthur, the adjustments are primarily driven by inflation. Congress aims to match economic changes, ensuring a fair and realistic taxation system. While the specifics may vary, keeping pace with inflation is crucial for a well-functioning tax structure.
Proactive tax planning begins with assessing your current net income and projecting it for the rest of the year. Taking into account additional sources of income and potential deductions, the goal is to identify strategies to reduce tax liabilities. This could involve transitioning to an S-Corp, exploring retirement plans like a solo 401(k), or leveraging business expenses to your advantage.
Tax planning isn’t just about saving money today; it’s an investment in your future. By strategically using available options like Roth IRAs or solo 401(k)s, business owners can secure their financial well-being down the road.
There are often-overlooked strategies that many of us miss, such as hiring your children for business-related tasks. Not only is this a potential tax write-off, but it also allows you to invest in their future education through 529 plans. These nuanced approaches showcase the importance of staying informed and making the tax code work for you.
In the realm of taxation, knowledge is power. Arthur Lee expressed a sense of sadness when witnessing individuals missing out on potential savings due to lack of awareness. He advocates for an educational approach, encouraging everyone to pay their fair share but not a penny more.
As we step into 2024, small business owners have an opportunity to optimize their finances. Understanding the changes in tax brackets, focusing on effective tax rates, and embracing proactive tax planning can lead to significant savings. By staying informed and making strategic financial moves, you can ensure that your hard-earned money is working for you and your business’s future.
Pat spent two decades in broadcasting management and hosting. After leaving the radio industry, he spent time consulting small businesses and realized the support system for entrepreneurs was broken. Where could you find help for improving small businesses and building real connections with other like-minded people. In June of 2020, the Idea Collective Small Business Community was born.
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