• Minimize taxable income while saving for retirement. If you are an employee, you make contributions to your 401(k) plan with pretax dollars, thus reducing your current income and, possibly, your current-year taxes. You can also reduce current-year taxes by making tax-deductible contributions to an IRA, if you qualify. If you are self-employed, you can use a Keogh, SEP (Simplified Employee Pension), or SIMPLE (Savings Incentive Match Plan for Employees) plan to shelter income.
• Maximize deductions. Some deductible items, like medical expenses, must meet a specific threshold before deductions can be taken. If you fall short of the minimum, you may be able to time discretionary expenses so that you exceed the threshold one year but not the next.
• Consider charitable donations. Depending on your specific tax picture, charitable donations could provide a good source of income tax deductions. One tax-saving strategy is to donate appreciated property. You can take a deduction for the fair market value and avoid capital gains tax on the sale.
• Review Form 1040 for missed tax opportunities. Reviewing your 1040 could help you spot opportunities for making investments that provide greater after-tax savings. Pay special attention to the Taxable Interest, Tax-Exempt Income, and Dividend Income sections of the form.
• Municipal bonds. Tax-exempt municipal bonds are an excellent tax-advantaged investment, especially if you are in a high income tax bracket or have moved into a higher tax bracket after a promotion or career change. Interest earned on municipal bonds is exempt from federal income taxes and, in most states, from state and local taxes for residents of the issuing states (although income on certain bonds for particular investors may be subject to the Alternative Minimum Tax).
• Review IRA opportunities. If you want to maximize the timing and amount of IRA distributions as long as possible for your heirs, understanding IRA rules is critical. If you are retiring or changing jobs, consider rolling over the assets in your company’s pension and 401(k) plan to an IRA. If you have a traditional IRA, evaluate whether it would be beneficial to convert it to a Roth IRA.
• Estate planning strategies. Review and update your estate plan to minimize potential estate and gift taxes.
These are just a few of the most common tax planning strategies. We can work with you and your tax professional to review your current situation and determine which ideas may be beneficial to you.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.