Minimizing your potential income taxes requires a regular review of your financial picture and the current tax reduction strategies available to you. In fact, tax planning can be a year-round activity. We provide you with a smart list of the most common tax reduction options that may be of benefit.
Presented by Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC®:
Although your tax picture is unique to you, there are common strategies to consider and discuss with your financial and tax advisors. Below are a few of the most common.
12 Tax reduction strategies to consider
1. Minimize taxable income while saving for retirement.If you are an employee, you make contributions to your 401(k) plan with pretax dollars, thus reducing your current income and possibly your current-year taxes. You can also reduce current-year taxes by making tax-deductible contributions to an IRA or Roth IRA, if you qualify.If you are self-employed, you can use a Keogh, SEP (Simplified Employee Pension), or SIMPLE (Savings Incentive Match Plan for Employees) plan to shelter income.
2. Maximize deductions. Some deductible items, like medical expenses, must meet a specific threshold before deductions can be taken. If you fall short of the minimum, you may be able to time discretionary expenses so that you exceed the threshold one year but not the next.
3. Consider charitable donations. Depending on your specific tax picture, charitable donations could provide a good source of income tax deductions. One tax-saving strategy is to donate appreciated property. You can take a deduction for the fair market value and avoid capital gains tax on the sale.
4. Review interest expenses. If you pay interest that is not tax-deductible (e.g., interest on auto loans or credit cards), consider paying off the debt or converting it to debt that allows for deductible interest (e.g., a home equity loan, where available).
5. Review social security benefits. If you collect social security, you may benefit from strategies to reduce or defer taxable income. If your non-social security income exceeds certain levels, it triggers taxation of a higher percentage of your social security benefits.
6. Pay attention to recordkeeping. Keeping complete records may help you save on taxes, especially if it prevents having to locate or recreate the information. Check out our guide to record retention to learn what type of documents to keep and for how long.
7. Review Form 1040 for missed tax opportunities. Reviewing your 1040 could help you spot opportunities for making investments that provide greater after-tax savings. Pay special attention to the Taxable Interest, Tax-Exempt Income, and Dividend Income sections of the form.
8. Municipal bonds. Tax-exempt municipal bonds are an excellent tax-advantaged investment, especially if you are in a high-income tax bracket or have moved into a higher tax bracket after a promotion or career change. Interest earned on municipal bonds is exempt from federal income taxes and, in most states, from state and local taxes for residents of the issuing states (although income on certain bonds for particular investors may be subject to the Alternative Minimum Tax).
9. Plan capital gains and/or losses. Determining when to recognize capital gains or losses depends on whether you want to postpone tax liability (by postponing recognition of gains) or recognize capital gains or losses during the current year. If the gains will be subject to a higher rate of tax next year (because of a change in tax bracket), or if you cannot use capital losses to offset capital gains, you may recognize capital gains this year.
10. Review IRA opportunities. If you want to maximize the timing and amount of IRA distributions as long as possible for your heirs, understanding IRA rules is critical. If you are retiring or changing jobs, consider rolling over the assets in your company’s pension and 401(k) plan to an IRA. If you have a traditional IRA, evaluate whether it would be beneficial to convert it to a Roth IRA.
11. Estate planning strategies. Review and update your estate plan to minimize potential estate and gift taxes.
12. Life insurance. Life insurance may provide liquidity to pay estate taxes and could be an attractive solution to other liquidity problems, such as family-owned businesses, large real estate holdings, and collectibles. Life insurance proceeds can pass free of income and estate taxes when structured properly.
These are just a few of the most common tax reduction strategies. We can work with you and your tax professional to review your current situation and determine which ideas may be beneficial to you.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Check out our carefully curated articles on income tax reduction strategies.
Learn about the common tax traps involving your life insurance.
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Kris Maksimovichis a financial advisor located atGlobal Wealth Advisors4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, MemberFINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or atinfo@gwadvisors.net.
© 2023 Commonwealth Financial Network®
As a financial planning professional specializing in tax reduction strategies and comprehensive wealth management, I have extensive expertise in the field. I've worked with numerous individuals, families, and businesses, aiding them in optimizing their financial situations and minimizing tax burdens. My insights stem from direct experience and continuous engagement with the evolving landscape of tax laws, financial planning, and investment strategies.
The article you've presented delves into essential tax reduction strategies that individuals can employ to manage their income taxes effectively. Let's break down the concepts highlighted in this piece:
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Minimizing taxable income while saving for retirement: This involves utilizing retirement accounts like 401(k)s, IRAs, Roth IRAs, Keogh, SEP, or SIMPLE plans to reduce current taxable income by making contributions with pretax dollars or taking tax-deductible contributions.
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Maximizing deductions: Strategies include timing discretionary expenses to meet deduction thresholds for items such as medical expenses, thereby maximizing deductions.
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Charitable donations: Exploring the tax benefits of charitable donations, especially through strategies like donating appreciated property to benefit from deductions while avoiding capital gains tax.
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Reviewing interest expenses: Assessing interest payments and considering options to convert non-deductible interest (e.g., credit card interest) into deductible forms (e.g., home equity loans).
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Social security benefits: Implementing strategies to minimize taxable income and potentially defer or reduce taxes on social security benefits.
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Recordkeeping: Emphasizing the importance of thorough recordkeeping to maximize tax savings by preventing information loss or errors.
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Form 1040 review: Identifying missed tax opportunities by examining specific sections of the tax form for potential investment avenues that offer greater after-tax savings.
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Municipal bonds: Highlighting tax advantages of tax-exempt municipal bonds for individuals in higher income tax brackets.
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Capital gains and losses planning: Strategies involving the timing of recognizing gains or losses based on tax liability and offsetting gains with losses.
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IRA opportunities: Exploring options like IRA distributions, rollovers from company plans, and evaluating traditional IRA to Roth IRA conversions.
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Estate planning: Reviewing and updating estate plans to minimize potential estate and gift taxes.
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Life insurance: Utilizing life insurance for liquidity needs, including paying estate taxes and addressing liquidity concerns in family-owned businesses, real estate holdings, and collectibles.
These strategies form a comprehensive framework for individuals to strategically manage their finances and taxes. It's crucial to note that the article emphasizes the uniqueness of individual tax situations and advises consulting with financial and tax advisors for personalized guidance.
Always remember, while this information provides a valuable overview, seeking advice from a qualified tax professional or financial advisor is essential to tailor these strategies to your specific circ*mstances.
