Tag Archives: TAX

What is the Best Way to Reduce Your Federal Income Tax?

As a CERTIFIED FINANCIAL PLANNER™ , this is a subject that I get asked frequently. There is no one best answer to this question, however there are a number of places you can look to take advantage of tax breaks the government makes available. My first suggestion is “don’t let the tax dog wag the lifestyle tail”.logo-irs.gif

Before You Start:

  • Review your “life plan”

Starting a business is one of the best ways to avoid (not evade) taxes if there is something that you have a genuine passion for. Starting a business is a major undertaking, however if you have interests in certain areas, think along the lines of how you could make a career of it . If you like photography, start a photography business. Fishing, how about a charter? Following your own interests will be your best guide as to the type of business you create.

As an individual, you might say that you earn money, pay taxes, and live on what’s left. A business earns money, takes deductions, then pays taxes on what’s left. Big distinction! The type of business (S corp, C corp, etc.) will dictate the specifics on business tax deductions.

In addition to deductions for running the business, you might be entitled to establish a retirement plan or pension plan for your business. Retirement plans are deducted from your income and are a deduction for the business. Depending on what type of plan you establish, contribution limits for retirement plans range from $44k to almost $200k per year! Deductions for retirement plan contributions could provide a major source of tax savings and be a good step toward securing a better retirement nest egg for yourself.

If starting a business isn’t your cup of tea,  home mortgage interest allows for a hefty deduction. Currently the government allows homeowners to deduct “qualified residence interest” of up to $1,000,000 of “acquisition debt” and up to $100,000 of home equity debt.

The Alternativee Minimum Tax (AMT) has been affecting average taxpayers more and more over the years.  The AMT can severely limit your ability to take certain kinds of deductions and it is important to work with a qualified tax professional or financial planner who can advise you on your individual situation before you implement a new strategy.

Opportunity abounds for people to save money on taxes. The right strategy will depend on your goals, opportunities, and stage of life.

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Learning From Warren Buffett-Good For the Heart, Good For The Tax Return

 The Associated Press recently reported that Warren Buffett Wants Charities to Use His Fortune Within 10 Years After His Estate Is Closed.

Warren Buffett is arguably one of the greatest investors of all time. We should all be so fortunate to be in his position. Warren Buffett is not only a smart investor and generous philanthropist, he no doubt has achieved significant tax benefits from his donations.

If I were in his shoes, I would want to create a lasting charitable legacy that carried on after my death. I find no greater satisfaction in knowing that my money went to worthy causes and helped in contributing to make the world a better place.

I’m sure most people who had Warren Buffett’s money would answer the same way. The fact is, people who have significant wealth over the current Unified Credit Amount (for gift and estate tax purposes) are subject to onerous estate taxes (45% Federal, plus any applicable state death taxes) at the time of their death. People in this position who take the time to plan their estates properly, can realize significant tax deductions by making charitable contributions. Vehicles like Charitable Remainder Trusts can provide a tax deduction for the charitable contribution, remove assets from one’s estate so that they are not subject to estate taxes, and provide the donor with an income stream in return for the contribution. In my opinion, these kinds of trusts are particularly useful when one has highly appreciated assets (like real estate or low basis stock positions) which would be subject to capital gains tax if sold outside the protection of a trust of this type. In some cases, the donor can actually wind up with MORE, by actually gifting the asset away! This should not be construed as legal advice (I’m not an attorney and not qualified to give legal advice), but a wake up call to people that if done properly, people can have their cake and eat it too in many cases. When considering a charitable gift of this nature, I would say that it is helpful to determine how much money one needs in order to live the lifestyle they desire, how much estate taxes they could potentially be subject to, what steps could be taken to reduce their taxable estate, and what legacy objectives could be realized as part of this process.

Warren Buffett’s desire to have the charitable organizations spend his assets within 10 years of his death reflect a trend among large donors called “Strategic Philanthropy” where donors want to have more control of what happens to the money that they donate. Realizing that in some cases, only a very small percentage of a donor’s contribution goes to the actual cause intended, many wealthy individuals have opted to create their own private foundations instead. This can allow the donor to take a salary (within limits) from the foundation, employ family members for pay (within limits) and create a lasting legacy that carries on after the donor’s death. People are advised to speak to a qualified estate attorney for legal advice.

In my opinion, the bottom line is that while many people know “giving to charity is good” they don’t know about the financial benefits that can come from “doing good”. I’ll bet Warren knows…

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