Lower your Income Taxes

So you’d like to pay less income tax?

Some people are happy to pay their taxes without itemizing their deductions. If you are happy with the standard deduction, you can skip this section. If you are not content with the crumbs of the standard deduction, you may want to try this next exercise. This exercise is a practical application designed to help you take a look back at where you've paid taxes in the past and how you may be able to reduce your income tax exposure in the years ahead. The first thing that you should do is dust off your past few year’s tax returns.
Try to locate Form 1040 which is the actual tax return and look at the first page where the line items are numbered. You can then begin to use some of the following suggestions to take a look at your own tax returns, and identify areas where you may be currently overpaying taxes currently or where you may be likely to continue paying higher taxes in the future. Discover ways to help turn your long-term goals and retirement dreams into a reality. There are many potential ways to reduce your current taxation. Take a look at your own prior year’s tax return(s) and pay specific attention to specific lines. Look at each of these areas and then identify places that you can reposition capital in years to come in an effort to minimize your future taxation.
Our goal is to help you build a foundation for building a comprehensive long-term tax reduction game plan that also helps you meet your financial goals. Talk to your tax and financial professionals for details on your specific financial strategies. For many individuals, the first step toward creating your long-term financial plan is to review Tax Form 1040. This form contains a broad picture of your overall financial situation and may provide clues about other opportunities to reduce taxes hidden just beneath the surface. Here are some ideas for you and your financial professional(s) to look for in your Form 1040 listed section by section starting from the top.
(note: actual line items may vary from year to year.)

Lines 8A and 9A Dividend Interest. These lines identify interest and dividend income that may affect your tax situation. How can you continue to receive an interest and dividend income without increasing your tax burden? Answer: Tax-deferred products such as annuities and IRAs offer the potential to grow your assets without paying taxes on these earnings until money is withdrawn. Money withdrawn, earnings are subject to ordinary income tax. Withdrawals may be subject to a surrender charge, taxed as ordinary income, and prior to age 59½ may be subject to a 10 percent federal tax penalty. You may also want to consider a more strategic approach to include tax-favored products, as these investments may be eligible for reduced tax rates, or to utilize products that can allow your dollars to grow tax free, like a Roth IRA. Certain individuals may also be subject to the alternative minimum tax.

Line 9A, Line 9B. Dividends. Consider dividends that may be eligible for a 15 percent capital gains rate. These are reported in box 1B of Form 1099-DIV.

Line 12 Retirement Plans. Certain retirement plan contributions can help business owners save more. You may also want to speak with your lending institution about interest rates on loans that you may have. Currently, the maximum long term capital gains rate is 15 percent. Whenever possible, offset gains with losses that occurred within the same year. You may also have losses that can be carried over from year to year, so it’s important to keep accurate records of your investment transactions.

Line 13. Capital Gains. Why pay taxes on money you’re not using. Answer: Short-term capital gains are taxed as ordinary income tax rates. Long-term capital gains are currently taxed at a rate of approximately 15 percent, if you’re in a tax bracket of 25 percent or higher. Try to find products providing tax deferral on your money until you need it. Put yourself in control of your tax decisions!

Line 15. Consider converting to a Roth IRA if you are using your traditional IRA as a source of income. The converted amount will be taxable, but all future distributions will be tax-free. Coordinate this strategy with your CPA and your personal CFO.

Line 15A, 15B. Total IRA distributions taxable amounts.

Line 16A, 16B. Total pensions and annuities taxable amounts. Question: Are you nearing age 70½ and interested in reducing your tax liability. Are you currently taking periodic 72T or 72Q payments that are greater than your need? Answer: Consider other ways to take your IRA distributions, pensions, and annuities that may help minimize your current tax liability. You may be able to reduce the amount of your periodic 72T payments by making a one-time change to your calculation method. If you’re over age 70½, make sure that you aren’t overlooking a long forgotten IRA when determining your required minimum distribution amount. Failure to take a required minimum distribution may result in a penalty tax of 50 percent based on the amount you should have taken.

Line 17 Mortgage Interest. Review your older mortgages. Since very little interest paid is tax deductible, check with your lending institution regarding re-financing opportunities for your mortgages. This can be important if you are planning on distributing qualified money that has not yet been taxed, as it can offset some of the taxes due.

Line 25. Insurance Contributions to a qualified to a health savings account (HAS) may be deductible depending upon your health insurance plan. Use tax Form 8889 to calculate your allowable deductions.

Line 28. Self-employed, SEP, SIMPLE, and qualified plans. If you own your own business you are taking advantage of the contribution limits for these plans? Would an individual 401(k) or SIMPLE allow you contribute more? The SEP and individual 401(k) contribution limits can provide significant opportunity for contributions. To make an even larger tax deductible contribution, consider a one-person defined benefit plan.

Line 32. IRA deductions. Are you making the most of your IRA and other 401(k) plans? When saving for retirement, consider making regular contributions to an IRA. Depending upon your situation and the type of IRA, contributions may be tax deductible. Question: How can I reduce capital gains on highly appreciated assets? Answer: Consider gifts to your favorite charities. Instead of gifting cash to a charity, consider gifting appreciated stock or mutual fund, which otherwise would have triggered capital gains. Upon the sale of your assets to a charitable remainder trust (CRT), you may qualify for an income tax deduction or help to reduce capital gains taxes on highly appreciated assets. Work with your tax and legal professionals before implementing any of these strategies as they may unintentionally impact other areas of your plan.

Line 60: Additional tax on IRAs and other qualified retirement plans. Are you currently taking or are planning on taking withdrawals from your IRA, qualified plan, or annuity prior to age 59½? If so, these early withdrawals could result in a 10 percent federal tax penalty. Ask your financial professional about alternative ways to take early withdrawals that allow you to avoid this additional tax.

Line 63: Your total tax. Question: How can you reduce your total tax bill overall? Answer: To reduce your overall tax bill, by maximizing your contributions to your company through retirement plans. Once you’ve reached your ideal contribution limits to these plans, consider contributions to other types of tax deferred retirement tools, such as annuities and permanent life insurance plans. Annuity products can provide guaranteed income for life, as well as death benefits for beneficiaries during your asset accumulation phase.

These are certainly not the only deductions available. Work with your tax and legal professionals before implementing any of these strategies as they may unintentionally impact other areas of your plan.

If your deductions barely exceed the standard deduction on a regular basis, you may want to consider bunching deductions. This strategy consists of timing your itemized deductions to any extent possible, such as charitable contributions, so that you alternate between itemizing deductions and taking the standard deduction in alternate years. This may be advantageous in years where your income is higher.

From Ivy League Wealth Secrets by Keith R. Soltis
Learn more at www.ivyleaguewealthsecrets.com