Tax & Financial Consulting Services
5 Ways to Beat the Tax Man
Today is my least favorite day of the year.
Like clockwork, Uncle Sam is knocking on my door ... he's asking for a handful of complicated forms ... oh, and he wants a large percentage of my hard-earned money, too. Yes, today is tax day.
Nothing galls me more than thinking about just how much of our money gets sucked up by taxes.
First, employers pay them. Then, we pay them again as individuals. If we manage to save some of the remaining money, we pay taxes on any interest we earn. And even if we spend every dollar ... we pay taxes — again — on nearly everything we buy!
Almost equally annoying are all the forms. I mean, isn't this process supposed to be accessible and understandable to every citizen? Judging by the proliferation of tax software, nothing could be further from the truth.
Still...I insist on doing my taxes every year, pencil, spreadsheet and calculator. I figure it's the only way to know how badly I'm getting ripped off. Plus, it motivates me to get better and better at doing everything in my power to lower my taxes going forward. As economist John Maynard Keynes once said, "The avoidance of taxes is the only intellectual pursuit that carries any reward." I stress..."Avoidance" not "Evasion."
So today I'm going to tell you why my favorite investments — can not only help you get maximum income but also really help you save some coin on future tax days.
Take Advantage of All the Tax Shelters Available to You!
I know, I know. Tax shelters conjure up visions of esoteric legal loopholes and shady offshore accounts. But they're not just for the wealthiest 1% ... in fact, there are plenty of them available to most investors.
Here are just five of them:
#1. GET YOUR OWN BUSINESS - Most people pay 35-42% of their income into taxes before they even get their check. (Ex: Fed 25%, State 6%, FICA 7.65% = 38.65%) If you are in a higher tax bracket, say the 30-35% Federal tax bracket you see how you could literally be bleeding blood from your paycheck. Somehow we seem to forget that the war with Mother England in the 1700's was about taxes. During that time, the average citizens tax rate was 3-5% and bloody wars were fought over that. What would our ancestors think abour 30-45%...Hmmm?
Well, back to why you need a business, It's this simple, if you have a business and you attempt to make a profit and run your business like a business, then you have access to over 422 tax deductions. This means if you are in the 30% tax bracket, then for every $1 you deduct then you get to keep $.30 of it. In essence a 30% rate of return (ROR) on your money.
So, if you have $10,000 in business tax deductions, that would be a $3000 tax savings, $20,000 = $6000 tax savings...etc. So, you do the math, where else coulc you get those kinds of gains in your 401K plan? Take a look to see what your 401K plan is doing right now...you are lucky if you are even getting a positive ROR on your money. But, this strategy guarantees you double digit returns every year, Now you see why I'll never get rid of my business.
To get more information on why you need a business, visit my website, visit the "audio" library and listen to the audio call "Bus vs. Job" and you'll understand why I rate this as the #1 tax strategy to beat the TAX MAN.
#2. 4021K PLANS — Most employers offer these retirement accounts, and they're a great way to keep money away from Uncle Sam. That's because whatever you contribute is taken out of your pre-tax earnings. Not only does that mean you are deferring taxes on the amount contributed, but you also might be bumping yourself into an overall lower tax bracket.
For 2008, most people can put away as much as $15,500, and if you're over age 50 you may be eligible to contribute an additional $5,000 in catch-up money!
Meanwhile, your investments grow tax-free until you cash out during retirement. Add in the fact that many companies are willing to match some of your contributions and you can see why I think 401(k) participation is a complete no-brainer.
#3. INDIVIDUAL RETIREMENT ACCOUNTS (IRAs) — Whether you have access to a 401(k) or not, you can also contribute to an individual retirement account every year provided you have earned income that falls within a certain threshold (see my table for the details).
2008 IRA Phaseout Levels
Status Full Contribution Partial Contribution
Single Under $101,000 Under $116,000
Married, Filing Jointly Under $159,000 Under $169,000
Married, Filing Separately,
Lived Apart Entire Year Under $101,000 Under $116,000
Married, Filing Separately,
Lived Together Any Part of Year N/A Under $10,000
*Figures represent Modified Adjusted Gross Income
For 2008, investors can contribute up to $5,000 to their IRA accounts. If you're at least 50 years old, you can also take advantage of a special catch-up provision and stash away another $1,000.
Just remember that you cannot max out both a regular and a Roth IRA in the same tax year. Your total contributions to all IRA accounts (not counting rollovers and such) must fall within the ranges I just cited.
Which is the better choice — a Roth or a regular IRA? Only you can decide based on your eligibility, age, goals, etc. But I will say that the Roth IRA has a few advantages including no required withdrawals, no age restrictions, and no more taxation of any money earned in the account ... EVER! However, I'm one to believe tomorrow isn't promised, along with tax breaks so I say give me my breaks now.
#4. COVERDELL EDUCATION SAVINGS ACCOUNT — If you have a child or grandchild you'd like to help out, this type of account is a nice little tax-shelter for them. You can put in $2000 every year for the minor's education (up until their 18th birthday).
Coverdells operate much like Roth IRAs (they were formerly known as Education IRAs). As long as later withdrawals go to qualified education expenses, your original contributions and any investment returns are not taxed. Currently, those expenses include not only college costs but even private elementary or high school tuition, too. That's a sweet deal!
The beneficiary of the account has until age 30 to use the funds. After that point, they must either withdraw the money and pay taxes plus a 10% penalty or roll the funds into a new Coverdell account for another beneficiary. But in my book, this is a terrific tax shelter for just about any child in your life.
#5. 529 PLANS— Again, these are great for parents, grandparents, or anyone else looking to help put a child through college. Like Coverdell accounts, they allow contributions to grow tax deferred. Plus, distributions will be tax free as long as they go to qualified education costs (in this case, it's only post-secondary education purposes).
In addition, depending on the plan, the future student is not the only one who reaps tax benefits ... the contributor can too! See, 529 plans are sponsored by individual states and some will allow residents to write-off the money they put into a plan against their income taxes. Considering that some 529s accept as much as $300,000 in contributions over the life of the account, your tax benefits can be extremely significant!
Okay, so now that I've told you about SOME "everyman" tax shelters, you're still left with the giant challenge of figuring out what to invest in. What's more, you still have to find ways to maximize your profits and minimize your taxes in your regular investment accounts.
Well, my solution for both purposes is the same ...Just set up an appointmet and we can discuss some of them.
Tax & Financial Consultant, RFC
866-361-3872 toll free fax
"Those who do not learn the lessons of history indeed are condemned to relive them."
LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what we've learned as financial consultants. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. G&G Associates expressly forbids from having a financial interest in any security that is recommended to our subscribers.