3 Ways to Postpone Income to Reduce Taxes

There is nothing you can do to entirely avoid paying taxes on income you earn, but you can lawfully reduce taxes in any given year despite your income through determined efforts. Most of these efforts involve putting off receiving the income to a later date. You can do this both with traditional income and investment income. If you want to collect the paycheck but do not want to pay taxes, you will need to get a little more creative using tools such as tax deductions from your annual tax filing.

#1 Delayed Compensation

You can ask your employer to delay compensation to you through many methods. Many employers will be flexible enough to work with you in order to reduce your tax burden in a given year by offering options such as stock or equity rather than cash income. With these forms of compensation, income can be deferred until you actually sell the stock and receive your cash income. Some employers will not offer stock. This is true particularly of small private companies whose owners want to maintain ownership. In this case, ask for your compensation on a delayed schedule. You may find it more favorable to treat your compensation as a bonus rather than as salary. 

#2 Reinvested Earnings

With your investment income, the best model to delay taxes is simply to reinvest before you fully collect a profit. This is commonly referred to as capital gains deferment, and it works in a straight forward manner. When you earn money from selling an investment, earning a dividend or otherwise receiving a payout, immediately reinvest the earnings into a new investment. You will not have to pay the capital gains tax on the initial profit. Instead, you will hold onto the new investment and pay capital gains only when it is in turn sold. If you hold on to all your investments until retirement, for example, you will eventually be in a lower capital gains tax bracket than you were when you made the investments initially. This means you have not only delayed payment but actually reduced the taxes you will owe.

#3 Deductions

Perhaps the best way to reduce your taxable income in any given year is through maximized deductions. You will be able to contribute a large amount of income to tax-deductible retirement plans. These qualified plans, whether they are traditional IRAs or 401ks, will allow you to place pre-tax money into an account for later in life. As long as you hold onto the account without making withdrawals until your qualified age, you will be able to postpone taxes and pay at a lower tax bracket in the future. You may also place your earnings into creative accounts, such as annuities, that may receive preferential tax treatment. Remember: the amount you can deduct each year is capped according to your income by the Internal Revenue Service. If you contribute more than your deductible amount to these types of accounts, you may face a penalty for excess contributions. To avoid penalties, assure you reduce taxes only in a method permitted by the IRS.

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