Thursday, April 14, 2016

Tax Time is the Right Time for Making Money

by Richard Cadena

Don’t work too many hours or you’ll have to pay more taxes.

That’s the narrative that’s been floating around the workforce for longer than I can remember. I was in college the first time I heard it, and I heard it again today from a stagehand. I’ve always wondered about the validity of the idea, but I never gave it too much thought because I assumed that working more hours would pay for the extra taxes and that would always yield more take-home pay. It turns out that, in the United States, we have a progressive tax system that doesn’t penalize you for working more hours, even if that puts you in a higher tax bracket and taxes take a bigger percentage of your paycheck.

In 2015, there were seven tax brackets in the USA, ranging from 10% to 39.6%, and four different filing statuses; Single, Married filing Joint Return & Widower, Married filing Separate Returns, and Head of Household. Suppose, for example, that you’re a single stagehand and you earn $20 per hour. If you work between 462 and 1875 hours of straight time per year, then you’ll fall into the 15% tax bracket. That will happen if you work between nine and 37.5 hours per week for 50 weeks out of the year, and you’ll earn between $9000 and $37,450 annually if you work no overtime.

But suppose you work just three more hours. Those three hours of pay will put your earnings beyond the $37,450 barrier, and you’ll jump from the 15% tax bracket to the 25% bracket. But it’s a progressive tax, meaning that you’ll pay 10% on the first $9,225, 15% on the portion between $9,225 and $37,450 and 25% on the portion over $37,450. It works out to an increase of only $7. That should make you feel good, not bad, about breaking into the next tax bracket. You’re contributing to society and your take-home pay has gone up, not down, as some people might have you believe.

Still, it’s a good idea to maximize your deductions and minimize your tax bill. Deductions were put in place for you to legally take advantage of tax breaks, so you might as well use them when you can.
If you itemize your deductions, you might be able to save or spend your way down to a lower tax bracket. If you take a look at the IRS 1040 tax form, you’ll notice that your taxable income excludes, among other things, contributions to a health savings account (HSA) or a traditional IRA (individual retirement arrangement). So, if you haven’t already maxed out your contributions, then you might be able to make a strategic contribution to reduce your tax bill.

It’s a good idea, for example, to max out your contributions to an IRA,which, in 2015, was $5500. It will reduce your taxable income and your savings will grow tax-free until you start making withdrawals.

You can also lower your tax bill by buying job-related gear or investing in your education. If you have deductions in excess of the standard deductions ($6,300 for Single or Married filing separately; $12,600 for Married filing jointly or Qualifying widow/widower; $9,250 for Head of household), then you can take deductions on certain job-related expenditures, like tools, software, classes or workshops, or even travel to trade shows. Suppose, for example, that you use a computer exclusively for your work and you buy a new laptop. Then you’ve legally gotten the US government to subsidize your laptop. It’s completely legal, ethical, and moral. Have you been eying a new multimeter? Get a really nice and expensive one and let Uncle Sam help you pay for it. And throw in some training at LDI while you’re at it. It’s almost like printing money.

I’m not an accountant, and I don’t pretend to know the tax code any better than the average stagehand, so don’t take this as gospel. Go to a reputable accountant and make sure you’re making the right tax moves. A good accountant will cost you a few hundred dollars, but it’s tax deductible and it just might put you in a better tax bracket.