save money on your 2016 taxes

Save money on my 2016 taxes?  Isn’t it too late for that?  In a word, no.

Disclaimer: I am a financial planner, not a tax professional.  All illustrations are for examples only and are based on the best of my knowledge from looking at the tax table and understanding of what my tax professional told me (not what he knows, simply my understanding).  Do not take any of the numbers below as guarantees, but simply a look at how this works conceptually.  If you are a tax professional and see a major mistake, please send me an email at so I can get it fixed.  Now, here we go:

Up until you file your taxes there is a little known way to lower your taxable income.  It’s not hidden, it’s just that few people know about it.  The IRS allows you to make a contribution to a retirement fund up until the time you file your taxes.  You can put up to $5,500 into this retirement fund and that is $5,500 that you will not be taxed on.  The median household income in the U.S. last year was about $65,000.  If you’re married and filing your taxes jointly, that puts you in a 15% tax bracket (for the sake of ease I’ll stick with the federal numbers.  State taxes vary).  That means that this year you can save an extra $825 on your taxes, as well as put some money away for retirement.  Keep in mind that this is tax deferred, not tax exempt, which means you will pay taxes on it eventually, but if you want to save some money this year you can do that.

Here’s where it gets really cool.  Let’s say that your taxable income last year was $80,ooo.  That puts you in the next tax bracket at 25%.  If you were to put that $5,500 into the tax deferred retirement account, that would save you a total of $1,295 in taxes!  The reason for this is that your contribution would take you down into the lower tax bracket of 15%, thus saving you even more.  If you’re a math nerd, here’s how it works (if you’re not a math nerd, skip to the next paragraph).  At $80,000, you pay $10,367.50 + 25% of the amount over $75,300, which comes out to $1,175.  That total is $11,542.50.  Contributing $5,500 to your retirement account brings your taxable income to $74,500.  In that tax bracket, you pay $1,855 + 15% of the amount over $18,550, which comes out to $8,392.50 for a total of $10,247.50.  $11,542.50-$10,247.50=$1,295.  That’s a pretty good savings.  What could you do with an extra $1,295 (as the financial planner inside me screams “Nooo, not Disneyland.  Pay down your debt!!”)?

Disclaimer #2: There are limitations to tax deferred contributions based on income for those that are offered retirement plans at work.  Be sure to talk to your financial planner about this so you can take advantage of these savings before it’s too late.  If you don’t have one, give me a call and I can help you.  You can find my information on the contact page.

Blessings to you all and may you live in financial freedom this year.