Review Income Tax Planning Strategies
With marginal tax rates of up to 35%, income taxes can have a significant effect on your financial situation. There are basically three strategies to help reduce your income tax bill:
- Reduce or eliminate taxes. The objective is to receive income in a nontaxable form or to find additional tax deductions, exemptions, or credits. For instance, you might want to consider municipal bonds, whose interest income is generally not subject to federal, and sometimes state and local, income taxes. Investigate investments that generate capital gains, such as growth stocks. Gains are not taxed until you actually sell the investment, and if held for over one year, capital gains are subject to the 15% capital gains tax (5% for individuals in the 10% or 15% tax bracket). If you have realized capital gains, you might want to offset those gains by selling investments with losses. Or consider investments that pay qualified dividends, which are taxed at capital gains tax rates.
- Postpone the payment of income taxes until some time in the future. By postponing tax payments, your earnings compound on the entire balance, including the portion that will eventually be paid in taxes. You may also be in a lower tax bracket when taxes are paid. As an example, contribute as much as possible to retirement accounts, including employer plans and Individual Retirement Accounts (IRAs).
- Shift the tax burden to another individual. The objective of this technique is to transfer assets to other individuals so any income on those assets becomes taxable to those individuals, who may be in lower tax brackets. Typically, however, you must give up control of the asset. For instance, annually you can give tax-free gifts, up to $11,000 in 2004 ($22,000 if the gift is split with your spouse), to any number of individuals. Any future income generated on those gifts then becomes taxable to those individuals. You may also want to use your lifetime gift tax exclusion of up to $1,000,000 to make larger gifts.
Digg It!, 
Reddit or 
Bookmark it!
