by Tony Novak, CPA, MBA, MT
There are many legal strategies available to reduce income tax
liability built into our federal tax laws. Adopting
one or more tax strategies now will result in lower taxes next spring. This
listing below is meant to highlight the planning possibilities but is not
intended to be a complete discussion of all of the details.
- For empty nesters... it pays to downsize the home. Married couples can
exclude up to $500,000 ($250,000 for single people) gain can be excluded on the
sale of a home. That means possibly a half million dollars completely free of
income tax. No other provision in the tax law is as generous. Considering the
recent run-up in housing prices in many areas, now 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 is a 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 benefit plan deductions. Self-employed
individuals can deduct up to 100% of income or up to $205,000 for contributions
to a private pension plan and usually more than 100% of total health care costs.
people close to retirement age who are self-employed and work in a small
business typically have the greatest opportunity to shelter earnings from taxes. Lower income self-employed individuals who have the discipline to save
will benefit from a Roth IRA, Health Savings Account and other options.
- For small businesses... Immediately deduct the cost up to $500,000 of
capital asset purchases used for
business (rather than deduct the cost over time). This break has been nicknamed the Range Rover write-off
when it was first introduced.1 The
tax benefit is magnified when you
finance a purchase and have not actually yet made cash payments. This tax break was meant to
provide extra spark to the economy, and it seems to be working. The IRS rules
are commonly discussed under the term "Section
- For employees... Receive tax-free reimbursement for out-of-pocket health
care expenses. Use a Health Savings Account (HSA) if you are self-employed or
Health Reimbursement Arrangement2
(HRA) if you are an employee. This should be an easy way to net a savings of $300
or more per employee per year in taxes.
- 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.
- 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. All investment gains and death
benefits are tax free to your named beneficiary. Living benefits taken in the
form of policy loans are also tax-free in a properly constructed policy. No
other financial vehicles offer this generous tax treatment. Pay the maximum
premium allowed into your policy to maximize the tax benefits. 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 to
test the strategies for your unique situation. Pay special attention to income
based phase-outs and the alternate minimum tax.
1 This article was
originally written under the tax law for 2006 and the amounts allowed
under Section 179 have increased since then, fortunately rising faster
than the price of Range Rovers and other capital goods.
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.
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
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.