Time to take a tax strategy

Time to take a tax strategy

Unfortunately with unprecedented spending by the new administration, there will be a point when the bill will come due. You can agree or disagree that it is the right thing to do, but one thing remains un-questionable, we will be taxed more heavily. Now, many individuals have taken solace in the fact that the president has said that the increases will only impact people with income over $250K, but this is simply not true. As with all taxes, even those intended for the rich, will find their way down to all incomes. All one has to do is look at the AMT, once a tax to ensure that high income earners “pay their fair share” now impacts people making as low as $50K per year. In NY, the millionaire’s tax now applies to people making nowhere near a million dollars. Finally, add inflation into the mix and individuals will really start to push the limits on the phase outs and policies intended for the wealthy.

So how can you minimize your taxes and keep more of your hard earned cash?

Maximize your 401K holdings

This is probably the simplest way to put money to work for you tax free. The current limits are $16,500 for individuals or $22,000 for anyone over the age of 50. The money goes in tax free and reduces your taxable income in the current year. As your money grows, you do not pay taxes until you retire. At that point the money is taxed as income, but you will have had many years of tax free growth.

Open a Roth IRA

While you do not get an immediate benefit from a Roth IRA, you will over the long term since gains are not taxed and when you retire you earnings will be available tax and penalty free. Unfortunately, if your combined income is over $166,000 you begin to phase out your eligibility and at $176,000 you can not contribute to a Roth IRA.

Don’t worry, if you hit the income levels you can open a Non-deductable IRA. Normally an IRA works similar to a 401K. You put money into the plan and you get an immediate tax savings on your income. In a non-deductable IRA you don’t get the up front tax break, but you do get years of growth tax free. At the end you will be taxed as ordinary income.

(As a side note, democrats do not care for Roth IRAs due to the tax free earnings at retirement. While there has not be any proposed legislation regarding them, it would not be surprising if they are shelved or modified in the next few years given that the democrats control the house and senate. You may have a limited opportunity to open one. Even if you can only spare a minor amount to open one, you will get you in the door and preserve your rights in future years to contribute when your finances change.)

Invest in tax free bonds and funds

Depending on your income, these can have substantially better returns then the market or other options. There are many good funds out there. The key is to find solid funds that have a good track record of returns. Many financial sites can help guide you in your selections.

Offset gains with losses

Unless you are perfect in your stock selections, you will have losses. This is probably one of the most important and hardest strategies to use. The reason being is it is almost always an emotional decision. If you can set aside your pride or feelings of hope, you can take a rational approach that can save you taxes. For example, say you were invested in Pepsi Co. and it is down 20% as the end of the year approaches. If Pepsi is down because of market forces then odds are Coke will also be down. If you sell your position in Pepsi and buy a position in Coke, you will now have a loss to use against any gains plus still be invested in an industry you feel will rebound. It does not always have to be a like industry, remember you are taking strategic loses by moving money into other stocks you feel will give you returns. Also remember don’t sell just to sell. Strategy is key.

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