Effective Ways To Reduce Your Federal Income Taxes: Part 1
By Myles Johnstone
Your goal is to take advantage of everything that will allow you to reduce your tax liabilities. The first step is a thorough assessment of your income tax situation. Make sure you're meeting your tax obligation through your withholding and your estimated tax payments, or a combination of both. Here are some of the most popular ways you can reduce your federal income taxes:
Sell at a loss: If you're planning to sell a stock in which you have a huge capital gain, consider pairing the sale with a different security in which you have a loss. In that way, you can offset your gain with a loss and perhaps pay less, or nothing, in capital gains taxes. If you still want to hold the stock that's down, consider selling for tax purposes and then repurchasing the stock thirty-one days after you sell. If you repurchase the stock before the thirty-first day, the IRS's "wash sale" provision will disallow your loss.
Shift some income to your children: Up to age fourteen, children pay tax on income over $1,400 at your marginal tax rate. (The first $650 in investment income earned is generally tax-free.) That's the so-called "IRS kiddie tax." At age fourteen, children pay based on how much they earn, just like anyone else. If you transfer assets to your children, you may pay less tax. On the other hand, your child will have control of those assets. On significant gifts, you may have additional gift taxes. You may give anyone a gift of up to $10,000 per year without triggering the gift tax.
Increase your charitable giving: If you paid a few thousand dollars for a painting now worth millions, you may be able to donate that painting to charity at its appreciated value, and use that value as a deduction against your current tax obligation. In addition, you owe no tax on the appreciated value of the asset. However, the sky is not the limit. If you give cash, you can deduct the full amount of your contribution up to 50 percent of your adjusted gross income. If you're giving more than that, you can carry forward the unused portion of the deduction for the next five years. If you still haven't used it up, it's gone. If you're giving appreciated assets, the maximum you can deduct is 30 percent of your adjusted gross income. If you need more time than that, consider pledging your donation over ten or twenty years. That effectively allows you fifteen or twenty-five years in which to maximize your deduction.
Roll It over: If you leave your job, are laid off, or are fired, and you have been contributing to a retirement account, you may take your contributions (as well as any matching proceeds that you are entitled to, based on your years at the company) and roll them over directly into an IRA without having to pay a tax. If you do not have the funds transferred directly into an IRA account, you'll be assessed a 20 percent penalty. You have sixty days to enact the transfer without triggering the penalty. And, you may make one tax-free rollover per year per IRA account. If you are rolling over a traditional IRA to a Roth IRA, however, you will have to include the amount of your IRA with your gross income and pay taxes on the amount transferred.
About the Author
Myles Johnstone writes exclusively for finance related sites such as Refinancing Finance Info.com, Vehicle Finance Info.com and finance Solutions info.com
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