Government spending constantly goes up, no matter what politicians promise.
With so many government programs, pork barrel spending and earmarks, it’s no wonder this country’s debt continues to rise. And exactly how does the government pay for all this? With taxes, whether creating new ones or increasing the rate of existing ones. The following blog discusses some of the strategies available that can help keep the government out of your wallet!
Strategy #1: Make significant charitable donations in the form of stocks or similar assets
One way to maximize your charitable contribution tax deduction is to make the donation in the form of an appreciated asset. For example, if you have stocks that you’ve owned for more than one year and which have appreciated in value, when you give the stocks to a charity, your tax deduction is the fair market value of the stocks, not what you paid for them. As a result, you never have to pay the capital gains tax on the stocks’ appreciated value.
Strategy #2: Offset your capital gains
Towards the end of the year, if you realize you will have a capital gain tax liability, you could offset those gains by selling assets which have lost value. There are two things to remember. First, be careful of making investment decisions, such as when to buy or sell, based solely on reducing your tax obligation. Perhaps selling a loser stock will reduce your capital gains to $0 for one year, but what if that stock triples in value several months after selling it?
Two, you are limited in the amount of losses you can use to offset capital gains in a given year, although some of the excess can be carried over to offset next year’s capital gains.
Strategy #3: Give income producing assets to those who are in a lower tax bracket
It’s not as easy to do as it used to be, but income shifting can still save money on taxes. For example, let’s say your marginal tax rate is 35% and you have dividend income from a stock you own. Those dividends will be taxed at the 35% marginal rate. But if you give those stocks to your children, who might be at the 10% marginal tax rate, the dividend income is only taxed at the 10% marginal tax rate.
There are two things to keep in mind. Depending on your child’s age and financial situation, they may still have to pay the same marginal tax rate as you. Also, gifts are only tax free as long as they’re $14,000 or less (for 2014 and 2015).
Strategy #4: Take advantage of flexible spending plans
Many employers offer flexible spending plans that allow employees to use pre-tax dollars to pay for things like medical care. These flexible spending plans, if used properly, allow employees to reduce their taxable income and use the difference to pay for things they would have had to pay for anyway.
Strategy #5: Take full advantage of your 401k, Roth IRA or Traditional IRA
If you want to reduce your taxable income now, put as much money into your 401k and traditional IRA as the limits allow. The contributions, if made properly, aren’t actually taxed until you decide to make withdrawals far in the future when you’re closer to retirement. This can be a good strategy if you believe you will be in a lower tax bracket when you start to withdraw funds from the 401k or traditional IRA.
However, if you predict that you will be in a higher tax bracket when you take money out of your IRA, then it might be wise to make contributions into a Roth IRA, which taxes contributions when made, but allows funds to be withdrawn, tax free.
This blog only scratches the surface as to what’s available to help shield your assets from taxation and how those techniques should be implemented. There are other details that must be considered in order to maximize and properly utilize the tax benefit. And don’t forget that using these or any other tax reduction method could increase your chance of a tax audit. Therefore, it’s recommended you consult with an experienced and knowledgeable tax professional for taxation risk management and to ensure any asset protection tax strategy is properly implemented.