planning ideas almost everyone can use
Although it may seem that the
tax laws have cut off all the avenues for reducing your taxes,
there are still some good ways to shelter income from the tax
The first step is to make sure
youre already taking advantage of all the deductions to
which youre entitled. Keep good records for substantiation,
and dont be afraid to write off allowable deductions.
Here are some ideas
everyone should consider:
- Favorable tax laws,
inflation, and appreciation have combined to make your
home the ultimate tax shelter.
- Home mortgage interest and
property taxes are deductible. Home mortgage interest
includes interest on any loan (up to a maximum of $1
million) to acquire, build or improve your home (or a
second home), and interest on home-equity loans (where
available) up to $100,000.
- Up to $250,000 of profit on
the sale of your home is not taxed if youre single
($500,000 for couples) and you meet certain ownership and
- When you die, the increased
value of your home is not subject to income tax. Your
heirs basis in your home is its fair market value
at your death. So given the right circumstances, you may
forever avoid income tax on the appreciation in the value
of your home.
EMPLOYEE RETIREMENT PLANS
- Next to your home,
participation in a retirement plan offered by your
employer is your best tax-cutting strategy. Since your
account is pooled with other employees accounts,
you receive the benefit of professional investment
advisors and the better rates of return available to
larger blocks of investors. You arent taxed on the
earnings in your retirement account until you begin
withdrawing the funds.
KEOGHS AND DEDUCTIBLE IRAs
- You may be able to reap tax
savings if your tax rate during your working years is
significantly higher than your tax rate when you retire.
For example, a self-employed person who makes tax
deductible contributions to a Keogh during the years when
she is in the 39.6% tax bracket, then withdraws the money
at retirement when shes in the 15% tax bracket will
have saved significant tax dollars.
- The interest on municipal
bonds is generally tax-free. When considering investment
alternatives, calculate whether tax-free municipals will
give higher yields than similar taxable investments. For
example, if youre in the 28% tax bracket, a
tax-free yield of 7% is equivalent to a taxable yield of
- If you need to fund college
educations for your children, you can shift assets to
your children and have the income taxed in their low
brackets as long as their unearned income stays under the
amount that triggers the "kiddie tax" ($1,300
- If your income is not too
high to disqualify you, consider buying Series EE savings
bonds to pay for college expenses. The interest on these
bonds is tax-free. Also consider education IRAs, a ROTH
IRA, or a regular IRA to build college savings. Amounts
withdrawn from IRAs for college expenses qualify for
favorable tax treatment.
RENTAL REAL ESTATE
- Rental real estate still
offers good tax shelter opportunities if youre
willing to actively manage the property. You can write
off up to $25,000 in losses against your earned income
such as wages, if your adjusted gross income is under
$100,000. This deduction phases out for taxpayers with
income over $100,000. Special rules apply if you are a
real estate professional, so get details.
In a given family group, the
various members may have tax brackets ranging from 15% for
children or elderly family members, to 28% for young working
family members, and 39.6% for middle-aged family members. Tax
planning for the family group should consider these brackets and
take full advantage of the tax-cutting opportunities that are
Some of the ways families might
use the tax law to their advantage include:
- Choosing the most
advantageous filing status.
- Planning to maximize the
tax benefits of the personal exemption.
- Shifting income to children
age 14 and older or up to the "kiddie tax"
limit for younger children.
- Hiring a child in your
business. Wages paid to a child may provide for
income-splitting that is, having those dollars
taxed in your childs tax bracket (presumably lower)
rather than in your higher bracket.
- Timing marriage or divorce
to minimize the tax cost.
- Investment vehicles such as
deferred annuities, nondeductible IRAs, U.S. savings
bonds, and certain insurance products feature the
compounding of earnings without a current tax. You pay
tax later when you withdraw the money. The combination of
compounding without tax and a lower rate at withdrawal
can mean substantial tax savings.
There are other
tax-cutting strategies in addition to those mentioned here. If
you would like assistance in selecting tax planning strategies
that make the most sense in your situation, contact our office.
1999-2007 by Paver Accounting ~~ Last revised: August 02,