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Tactical Strategies to Slash TaxesSubmitted by Townsend Asset Management Corp. on September 27th, 2016
Michael Solomon and Caleb Griffith gave a first-rate presentation at last week's seminar on ways to reduce tax liabilities. Equally great was the lively interaction of questions and comments from those attending. Here are the key points:
1. Individual Tactical Tax Plan
The seminar opened by focusing on the “Bingo Card” shown below with categories running along the top and strategies listed underneath. Participants were asked to:
- Look at the categories/strategies and determine which ones they would like to implement.
- Connect the selected strategies to create their own individual tactical tax plan.
Deferring income to reduce tax bracket in current year
|Paying property taxes for a future year in the current year||Utilizing capital losses in investment accounts||Charitable contributions directly from IRA||Excess IRA contributions to Roth IRA|
|Maximizing pretax contributions in current year||Paying estimated state taxes in the current year||Unreimbursed mileage for work||Donating appreciated stock||Deferring RMD from age 70 to age 71|
|Contributing to Roth IRA for tax savings in future years||
Maximizing medical deductions
|EXEMPTION||Primary home sale exemption||Beginning to distribute IRA funds at 59 1/2 to reduce tax in future years|
|Contributing to IRA for tax savings in current year||Realizing mortgage and home equity interest on Schedule A||Determining best filing status||Section 179 expense||401(k) rollover to IRA|
|Health Savings Account contributions in current year||Charitable mileage||100% of the current year's taxes vs 110% of previous years||Social Security tax on wage earners||Deferring Social Security benefits|
- IRA Strategies
- Lower the account value of your taxable IRA by taking distributions and rolling them into your ROTH IRA. At 70 ½ you must start taking distributions from your IRA which are taxable. However, at 59 ½ you are eligible to begin taking distributions. Depending on your tax bracket (if it is lower than you foresee it being in the future), it could be advantageous to take IRA distributions at any age, and roll that money directly into your ROTH IRA. That way, the money would then be in a non-taxable account for future use.
- When it comes time to take your first mandatory IRA distribution at 70 ½, look at your tax bracket. At the age of 70 ½ you can defer your distribution and take 2 distributions the following tax year, with the first one occurring on or before the filing deadline of April 15th.
- Tax Deductions
- Medical deductions – If you foresee big medical expenses (knee, hip replacements, etc.) plan for them to come about in the same calendar year so you can maximize your medical deductions.
- The majority of the amount spent in “Assisted Living” facilities is tax-deductible.
- Estimated state tax payments can be an itemized deduction. Although final payment is due January of following year, go ahead and pay it in December to allow it to be itemized for current tax year.
- If it is advantageous to your tax bracket, you can pay property tax twice in one year and both payments can be itemized. (Of course, for the following year, there would not be this deduction.)
- If you are tempted to pay off your home mortgage, consider the impact on your itemized deductions. The interest is usually the largest item on an itemized tax return.
- Charitable Contributions
- If you have to satisfy your “required minimum distribution”, reduce your taxable income by contributing to charity directly from your IRA. In order to do this, you must be at least 70 ½ and the maximum amount of the contribution is $100,000. Reducing your income could impact the amount you will be assessed for your Medicare premium and also potentially lowers your Social Security taxation.
- If you have stock that has appreciated, consider transferring the stock to charity to avoid capital gains tax.
- If you are under 65 and have a high deductible health insurance policy, you can set up a Health Savings Account (HSA) to pay for qualified medical expenses. Contribute pre-tax money to the HSA to reduce taxable income.
- You can make a once-in-a-lifetime tax-free distribution (up to the maximum annual HSA contribution limit) from your IRA to your HSA.
- Maximize contributions to your 401(k) retirement accounts. If you are self-employed, and you extend your tax return to October 15th this gives you an extra 6 months to contribute to your 401(k).
- Take the time to speak with your tax professional to plan your tax strategies!
Caleb Griffith, CFP®, is a Senior Financial Advisor at Townsend Asset Management Corp. Email: Caleb@AssetMgr.com
Michael Solomon is a Tax and Financial Advisor at Townsend Asset Management Corp. Email: Michael@AssetMgr.com
Bonnie Mole is Client Service and Communications Manager at Townsend Asset Management Corp., Raleigh, North Carolina. Email: Bonnie@AssetMgr.com