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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Here they are.

http://www.ebudget.ca.gov/pdf/GovernorsBudget/8000/9944.pdf 

In this sheet you can see every cut the governor plans to make and to what department.  Truly across the board cuts.

Is the right thing to do?  What are your thoughts?

Lots of debate going on about the cuts proposed to schools. Some headlines estimates say 100K lost jobs? Really, did they check the facts? Read for yourself to see how you think the cuts will pan out. More to come on this topic when I do a bit more research. Please comment.

From the California Budget Project: http://www.cbp.org/pdfs/2008/080116_govbudget.pdf

Here are the education reduction plans taken from the report above:

“K-12 Education
The Governor’s Proposed Budget reflects a total 2008-09 funding level of $55.6 billion for K-14 education programs covered by the Proposition 98 school funding guarantee, 2.5 percent below the funding level of $57.1 billion assumed by the 2007-08 Budget when it was enacted in August of 2007. The Governor’s Proposed Budget estimates that Proposition 98 would require a total of $59.7 billion in combined state and local spending in 2008-09. However, the Governor proposes to suspend the 2008-09 Proposition 98 guarantee and reduce funding for K-14 education by $4 billion. The Governor’s Proposed Budget allocates $39.6 billion as the state’s share of 2008-09 Proposition 98 funding, 9.2 percent less than would be required by the Proposition 98 guarantee. The Governor’s proposal translates into K-12 Proposition 98 per pupil spending of $8,458 in 2008-09, down from $8,558 in 2007-08, a 1.2 percent decrease.
The Governor proposes to seek legislation to reduce 2007-08 Proposition 98 spending by $400 million. The Governor’s proposal is motivated by the fact that current fund allocations from combined state and local sources exceed the level required by the Proposition 98 guarantee. This reflects the fact that, because of changing economic conditions, the Proposition 98 guarantee is now estimated to be lower than the level assumed by the 2007-08 Budget. The Governor also proposes to delay $1.3 billion in payments to K-14 education from July 2008 to September 2008.
To achieve the $4.4 billion in proposed 2008-09 General Fund reductions to K-12 education, the Governor proposes to:
•
Reduce general purpose funds for school districts and county offices of education by $142.4 million due to a projected enrollment decline of 0.52 percent.
•
Reduce revenue limit funding by $2.6 billion by eliminating the 4.94 percent COLA for school district and county offices of education. In addition, the Governor proposes to change the formula used to calculate the COLA for K-
7
12 education programs. The Governor’s proposal would reduce the 2008-09 COLA from 4.94 percent to 3.65 percent. Revenue limits provide general purpose funding for schools.
•
Reduce the state’s contribution to the STRS for retiree purchasing power protection from 2.5 percent to 2.2 percent of teacher payroll, for savings of $80 million, based on an actuarial study which found the benefit to be adequately funded. The Governor proposed – and the Legislature rejected – a similar change in 2007, which the Legislative Analyst notes “may violate active and retired teachers’ contractual rights and, therefore, be legally unworkable.”
•
Reduce funding for a number of categorical programs by $1.1 billion. In order to achieve these savings, the Governor proposes to eliminate COLAs and reduce rate allocations. Categorical programs include class size reduction, instructional materials, home-to-school transportation, and various career technical education programs.
•
Reduce special education funding by $357.9 million. The Governor proposes to eliminate COLAs and reduce existing state funding for special education. The Governor’s Proposed Budget states that schools may have to “backfill” these reductions since special education programs are federally mandated.”