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Tony Novak, MBA, MT, Certified Public Accountant
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Need a fast and easy personalized tax savings strategy for your unique situation? Request a customized list of possible strategies using our professional tax forecasting software based on your last year's tax return and the changes that you expect for the coming year. The results are presented both in a written report and a brief 10-20 minute personal consultation. The cost of this service is only $80. It could be you smartest financial move of the year! Just call or send a brief message of introduction to request a personal tax analysis and I'll respond with the details on the same business day.

Top ten easy tax shelters

by Tony Novak, CPA, MBA, MT      revised 12/10/2014

Our U.S. federal income tax laws include a number of legal strategies available to reduce income tax liability. Adopting one or more tax strategies now will result in lower taxes next spring at tax filing time but many strategies need to be planned and executed well in advance. This listing below is meant to highlight the planning possibilities but is not intended to be a complete discussion of all of the details.

  1. For empty nesters... it pays to downsize the home. Married couples can exclude up to $500,000 ($250,000 for single people) of gain on the sale of a home. That means possibly a half million dollars completely free of income tax. No other provision of the federal tax law is as generous. Considering the long term run-up in housing prices in many areas, this may be the time to consider cashing in and trading for a less expensive dwelling. There is no need to reinvest the gain in another house, so this strategy is perfect for empty-nesters who may be ready to downsize. See what the IRS has to say on this topic.financial planning checklist
  2. For self-employed individuals... Stretch tax-advantaged retirement plan deductions. Self-employed individuals can deduct up to 100% of current taxable income sometimes up to $260,000 for contributions to a private pension plan. Individuals who are close to retirement age, are self-employed, have income over $150,000 and work in a small business without many employees typically have the greatest opportunity to shelter earnings from taxes using this strategy. See this new article about setting up your own pension plan. Plan documents must be on place in the year that the deduction is to be taken but the investment may be made in the following year prior to tax return filing. Self-employed individuals at incomes less than that amount are more likely to benefit from a Simplified Employee Pension, Health Savings Account and other similar options. Any of these options can be started quickly and at minimal cost.
  3. For small businesses... Immediately deduct up to $500,000 for the cost of certain types of capital asset purchased rather than deduct the cost over time as is normally required. This break was nicknamed the Range Rover write-off when it was first introduced. The maximum allowed write-off was reduced to $25,000 for 2014 without the "tax extender" laws.1 The tax benefit is magnified when you finance a purchase and have not actually yet made cash payments. The IRS rules are commonly discussed under the term "Section 179".
  4. For employees... Receive tax-free reimbursement of out-of-pocket health care expenses. Use a Health Savings Account (HSA) if you are self-employed or use a Health Reimbursement Arrangement2 (HRA) for an employee. For 2014 the plan must be integrated with qualifying health insurance. Read more about HRAs here.
  5. For low income wage earners... a tax credit is available for low income individuals who make retirement plan contributions. The federal government effectively matches 50% of your deposit with a tax credit. Of course, the problem is that low income people do not have money to make retirement plan contributions. But parents could make a gift of IRA deposits to their children, for example, to effectively earn an immediate 50% return on their investment.
  6. For investors... eliminate taxable dividends and short term capital gains. Mutual funds held outside of a retirement plan are not tax-efficient for most investors. Exchange-traded funds, on the other hand eliminate all of the unwanted taxable distributions and put tax control in the hands of the investor.
  7. Use a deferred compensation plan. Despite recent tightening of rules for stock options and deferred compensation plans using corporate-owned life insurance, it is still easy to defer income using an employee benefit plan in other ways.
  8. Take advantage of cash value life Insurance. Life insurance remains as the best tax shelter available to everybody. All investment gains can be borrowed from the policy tax free and the death benefits are also tax free to your named beneficiary. No other financial vehicles offer this generous tax treatment. If tax shelter is the goal then it is important to pay the maximum premium allowed into your policy to maximize the tax benefits (paying the minimum required premium is a dangerous financial strategy even aside from tax planning). US taxpayers should use a domestic life insurance company since the IRS is now cracking down on insurance used to move assets outside the country.
  9. Take advantage of non-cash tax deduction for real estate depreciation. If you have rental properties, you may write off part of the purchase price and fix-up costs up to $25,000 per year even if most of the purchase price was borrowed.
  10. Use asset-based mortgages. for affluent individuals make it easy to finance 100% of the value of a primary home or vacation house. The interest is deductible and at today' s low interest rates, many are using a "cash out" refinancing to free funds for investments and other ventures.3don't stress over taxes

The best tax strategy for your unique situation might not be included on this list but typically can be developed though a tax planning discussion either in person or by telephone. Please call to schedule a time to discuss tax planning ideas.

Before committing to any tax strategy, complete a pro forma tax return (future hypothetical tax return) to test the strategies for your unique situation. Pay special attention to income based phase-outs and the alternate minimum tax.

Footnotes

1 The maximum deduction allowed under Section 179 has varied over time with changing tax laws. It increased to $500,000 and then reduced to $25,000 for 2014 without "tax extenders" that are still pending before Congress.

2 HRAs changed in 2014 under the rules for the Affordable Care Act but the same tax benefit will be available under a revised form called a "Limited Purpose HRA". See www.freedombenefits.org for more on starting one of these plans for a small business. The cost for professional assistance with set up is typically about $150 and two days lead time is often required.

3 Recent changes to mortgage banking regulations make these loans unavailable to most working-class Americans so I am now looking for a replacement #10 easy tax shelter. If you have a suggestion, please write me at onlineadviser@live.com.

Related resources

Tax planning checklist

Tax and financial planning data organizer

Status: available for reprint

Portions of the article are based on expired tax law and may now be obsolete.

This article is available for republication in its entirety without charge after obtaining the express written permission of the author.

Please e-mail a request to the author that includes the name of the requestor (individual and corporate) and the intended destination of publication.

 

 

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Member of New Jersey Society of Certified Public AccountantsThis Web site is independently owned and operated by Tony Novak operating under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator". Opinions expressed are the sole responsibility of the author and do not represent the opinion of any other person, company or entity mentioned. Tony Novak is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. Novak is compensated as an accountant, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to the commercial companies listed on this site or non-governmental commercial insurance exchanges. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Novak would be pleased to perform the requisite research and provide you with a detailed, written analysis at your request. Such an engagement would be subject to an engagement letter that would define the scope and limits of the desired consultation services.

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