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Tax Planning by John Jastremski

September 7, 2013

Develop a Tax-Planning Mentality

Many People Confuse tax planning with tax preparation and only think about the subject when preparing their annual tax return. However, there is little you can do to actually lower your bill when preparing your return. If your goal is to reduce income taxes, you need to be aware of tax-planning opportunities throughout the year. Take time early in the year, perhaps as part of the tax preparation process, to assess your tax situation, looking for ways to reduce your tax bill. Consider a host of items, such as the types of debt you owe, how you’re saving for retirement and college, which investments you own, and what tax-deductible expenses you incur.

It often helps to discuss these items with a professional who can review strategies you might not have considered. During the year, consider the tax consequences before making important financial decisions. This will prevent you from finding out later that there was a better way to handle the transaction for tax purposes. Look at your tax situation again in the fall, which gives you plenty of time before year-end to implement any additional tax-planning strategies. At that point, you’ll also have a better idea of your expected income and expenses for the year.

There are basically three strategies that can help reduce your income tax bill:

✔ REDUCE OR ELIMINATE TAXES. The objective is to receive income in a nontaxable form or to find additional tax deductions, exemptions, or credits. For instance, you might want to consider municipal bonds, whose interest income is generally not subject to federal, and sometimes state and local, income taxes. Or investigate investments that generate capital gains, such as growth stocks. Gains are not taxed until you actually sell the investment, and if held for over one year, capital gains are subject to the 15% capital gains tax (0% for individuals in the 10% or 15% tax bracket). If you have realized capital gains, you might want to offset those gains by selling investments with losses.

POSTPONE THE PAYMENT OF INCOME TAXES UNTIL SOMETIME IN THE FUTURE. By postponing tax payment, your earnings compound on the entire balance, including the portion that will eventually be paid in taxes. You may also be in a lower tax bracket when taxes are paid. As an example, contribute as much as possible to retirement accounts, including employer plans and individual retirement accounts (IRAs).

✔ SHIFT THE TAX BURDEN TO ANOTHER INDIVIDUAL. The objective of this technique is to transfer assets to other individuals so that any income on those assets becomes taxable to those individuals. Typically, however, you have to give up control of the asset. For instance, annually you can give tax-free gifts, up to $13,000 in 2009 ($26,000 if the gift is split with your spouse), to any number of individuals. Any future income generated on those gifts then becomes taxable to those individuals.

You may also want to use your lifetime gift tax exclusion of up to $1,000,000 to make larger gifts. Please call if you’d like to discuss tax strategies in more
detail. ✔✔✔

John Jastremski is a Representative with [QA3 Financial] and may be reached at jj@retiregroup.com

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice.  The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. Neither the named Representative nor Broker/Dealer gives tax or legal advice.

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