Many people don’t realize that sound tax strategies are part of a solid personal financial plan. So what’s practical and effective for some taxpayers may not be the best strategy for others. However, regardless of your financial goals, it’s important to look at possible tax strategies now, so you can generate tax savings for the entire year. Here are some of the best ways you can save tax dollars this year.
1. First, look at the big picture. Establish your investment goals and your insurance, education, and retirement needs. Make sure you under- stand the benefits that your company can offer you. Tax savings strategies will only make sense to you when you have a financial plan.
2. Make your retirement plan contribution now. Even if you can’t take a deduction for your contribution, remember that the money you put into the plan will compound on a tax deferred basis. Don’t wait until the end of the year because you’ll loose the benefit of compounding. Be careful however, that you won’t need the money until you are age 59½. Earlier withdrawals may incur an IRS penalty.
3. Make the maximum allowable salary contribution to your company’s 401 (k) plan. If your company makes matching contributions, the return on your investment is immediate. Furthermore, the tax on your 401 (k) plan is deferred. Extra benefit: Many 401(k) plans offer borrowing privileges to participants.
4. Don’t be trapped by the Alternative Minimum Tax. If you have large itemized deductions or donate large charitable gifts of appreciated property, you may be subject to the alternative minimum tax. If you are an aMT target, your tax plans may need to be drastically changed. Make sure to protect against the aMT at the beginning of the year, not the end when it may be too late to change strategies.
5. Use your W-2 withholding wisely. Consider changing the amount withheld from your paycheck. Deliberately overpaying the IRS doesn’t make sense. If your financial situation changes during the year, you can always adjust your W-2 withholding upward. Your goal should be to pay no more and no less than your actual taxes for the year.
6. Use debt to save taxes. although personal interest is no longer deductible, home mortgage interest, investment interest and business interest are still deductible with certain limitations. Now is the time to retire your personal debt and take advantage of fully deductible interest.
7. Shift income to save taxes. Use gifts as a tax sheltered way to shift income to children who are in a lower tax bracket. The maximum amount that a parent can give taxfree to each child is $14,000 a year. If a husband and wife make a joint gift, the maximum amount is $28,000.
If your child is no longer your dependent and not subject to the kiddie tax, the earnings on your gift to the child are taxed at the child’s tax bracket, which may be lower than yours.
If you are supporting your elderly parents, you can use the same strategy for making an annual gift to them. If your parents are in a lower tax bracket than you, you’ll save taxes by transferring income-producing assets to them. The sooner you make the gift, the more taxes you’ll save. The same limits apply to gifts to parents as to gifts to children.
8. Use Treasury bills to defer tax on interest income. Buy one year or less Treasury bills that come due in January of 2014. Since the T-bill interest isn’t taxable until the T-bill comes due, you can shift almost a full year of interest income into 2014.
9. Invite business contacts to your house. You can deduct 50 percent of the cost of business meals, even if the meals are served in your own house. Of course, the meal must be a business meal, and you must keep a record of who was there and what business discussions took place.
10. Review your 2012 tax return to find items that can be carried over to 2013. For example, you have capital loss carryovers from 2012, you can offset your 2013 capital gains by a like amount. additional carryovers include net operating losses, charitable deductions, investment interest expense, and various tax credits.
