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 man.
The first step is to make sure you're already taking advantage of all
the deductions to which you're entitled. Keep good records for substantiation,
and don't 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
you're single ($500,000 for couples) and you meet certain ownership
and use requirements.
EMPLOYEE RETIREMENT PLANS
- 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.
KEOGHS AND DEDUCTIBLE IRAs
- 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 aren't taxed on the earnings in your
retirement account until you begin withdrawing the funds.
- 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 she's 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
you're in the 28% tax bracket, a tax-free yield of 7% is equivalent
to a taxable yield of 9.72%.
- 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 for 1997).
RENTAL REAL ESTATE
- 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 still offers good tax shelter opportunities if
you're 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 available.
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 child's
tax bracket (presumably lower) rather than in your higher bracket.
- Timing marriage or divorce to minimize the tax cost.
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.
- 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.
Please call 1-866-571-7779 or email
us if you would like to receive a FREE brochure - "Tax Guide for Recordkeeping."
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