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12 Tax Tips For Today And Beyond

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With federal income tax brackets increasing in 2011¹, here are some tips to consider.

1. Consider using accounts where after-tax contributions may grow tax-free. Today there are tax-free options for both qualified (retirement plans) and non-qualified monies. Recognize that deferring taxes into the future is not necessarily "saving taxes."
   
   
2. Carefully consider whether you want to "lock up" money in accounts that can only be accessed when Congress picks a retirement age (currently 59 ½). For example, a 30-year-old funding a pre-tax 401(k) plan may not have access to that money for 30 years—and longer if Congress changes the retirement age. This strategy puts this investor at the mercy of the income tax rates 30 years from now. Having money more liquid can allow the investor to adjust strategies as the tax horizon may change.
   
   
3. Discuss with your accountant available tax credits or deductions.  A sample of tax credits and deductions:
   • Retirement Savers Credit (available for a single-filer with Adjustable Gross Income (AGI) of no more than $25,000; married-filing-jointly income AGI threshold is $50,000).
   • Energy Tax Credits … for home improvements related to windows, insulation, tankless water heaters, etc.  See www.energystar.gov for more information.
   • Educational Tax Credits (Hope Credits, Lifetime Learning Credits, etc.)
   • Telephone Excise Tax Refund, a standard refund of $30-$60 … or pull out your old phone bills and use the actual amount of taxes paid.
   • Long-term care insurance premium deductions.
   
   
4. Know the numbers …
   • Roth IRA contributions are prohibited for singles with a Modified Adjustable Gross Income (MAGI) of $110,000 or more (for a married taxpayer filing-jointly, the income limit is $160,000).
   • Roth conversions are for tax-payers with MAGI of less than $100,000.
   • Roth IRA contribution limit:  $4,000 per person; add another $1,000 if age 50 or older. 
   
   
5. Consider a Roth conversion in 2010.  In 2010 the income cap is eliminated for Roth conversions.  A traditional IRA can be converted into a Roth IRA and the tax bill can be spread over two years.
   
   
6. If you are in the 10% or 15% income tax bracket, sell highly appreciated assets in 2008-2010.  In these three years, capital gains are not taxed for these tax brackets.
   
   
7. For business owners, it’s not too late to buy a 6,000 lbs. SUV; may be worth a $25,000 deduction.
   
   
8. Consider trust planning which may allow for highly appreciated assets to be sold without paying capital gains taxes.  This special type of trust allows for the sale of an asset without taxation and may provide tax-deferred growth of the new asset.
   
   
9. For people older than 59 ½, consider how qualified money (401(k), 403(b), IRA, etc.) withdrawals may minimize future taxes.  By withdrawing monies early, a person may be able to reduce future Required Minimum Distributions that would push him or her into a higher tax bracket.  It may also save taxes to withdrawal qualified monies in a parent’s lower tax bracket so that money is not deferred to an heir’s higher tax bracket. 
   
   
10. If you are a business owner, consider how a corporate structure may save taxes.  A strategy of minimizing a personal salary and maximizing dividend distributions may save taxes.
    
    
11. During retirement, consider how spend-down strategies may reduce taxes.  Using up qualified monies early during the retirement phase may allow for lower taxes in later years.  Obtaining income by spending after-tax principal may also lower income taxes.
    
    
12. Avoid compound interest in taxable accounts.  Compounding taxable interest creates compound taxes.  Ask a Woolman advisor for alternative ideas. 
    
    

Source: Tax Act of 2003 Phase-In Timeline As Amended, Kettley Publishing , 2007.02

Disclosure:
Although this topic involves tax issues, neither Woolman Financial Group nor Securian Financial Services, Inc. provides specific tax advice. This information is a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.