Top ten easy tax shelters
by Tony Novak, CPA, MBA, MT revised 1/24/2016
Editing note for 2016: Individual tax planning services are now
offered as part of the concierge advisory package at
and not offered as a separate stand-alone service.
Our U.S. federal income tax laws include a number of built-in legal strategies available
to reduce income tax
liability. No matter what your unique financial position, your ability
to lower your income taxes likely depends on understanding and utilizing
the opportunities available in five key areas of financial planning: 1)
legal format of income generating entities, 2) accounting strategies, 3)
use of real estate, 3) use of income deferral strategies, and 5)
maximizing tax-free employee and executive benefits.
one or more of these 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
listing below is meant to highlight the planning possibilities but is not
intended to be a complete discussion of all of the details. Keep in mind that
the effectiveness of many of these tax strategies is multiplied when
they are used in combination.
- 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.
- 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.
- For small businesses... Immediately deduct up to $500,000 for the cost of certain types
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 scheduled to be reduced to
$25,000 for 2014 without the "tax extender" laws but is now restored to the full
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
- 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
Health Reimbursement Arrangement2
(HRA) for an employee. For 2014 the plan must be integrated with qualifying
Read more about HRAs here.
- For lower income wage earners... Long term capital gains are now
completely tax free as long as your total taxable income keeps you below the 15% tax
bracket threshold. This tax break is based on the lower "taxable income" not the
higher "adjusted gross income" amount so that more people actually qualify for
this tax break. Taxable income is typically about $10,000 lower than adjusted
gross income for single filers (or about $20,000 lower for married filers). That
means, for example, a married couple living on one income of $50,000 sells
something that they have owned for more than a year and make a $25,000 gain. The
entire $25,000 gain is tax free. Also, a separate 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.
Combining these strategies is even more effective: selling a capital gain asset
tax-free and putting the proceeds into a tax-deductible retirement contribution
and then getting an additional matching tax credit is an amazingly effective tax
strategy. The problem, of course, is that most low income people do not have
room in their budget for these types of transactions.
Need a personalized strategy to save taxes? Request a tax
planning consultation to develop a customized
list of possible strategies. This tax planning service is
based on your last year's tax return and adjusted for 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 included in the
basic concierge advisory package at
wealthmanagement.us.com. It could be your
smartest financial move of the year! Just call 800-609-0683 or send a brief message of introduction
request a personal tax analysis and I
will respond on the same
- 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.
- 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
- 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.
- 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
- 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.3
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
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.
1 The maximum deduction
under Section 179 has varied over time with changing tax laws. It increased to $500,000 and then
was scheduled to be reduced to
$25,000 for 2014 without the "tax extenders" bill that was recently
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
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
Tax and financial planning data
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position of any other person, company or entity mentioned in the article. 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. Tony Novak
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