Let’s Get Started Saving Taxes What you absolutely must be doing right now...
USE YOUR BRACKET!Of all the easiest of techniques to reduce your lifetime payment of taxes, this is it. It’s so very simple and with just a little conceptual knowledge you can take advantage of this powerful tool.
Here’s how it works. Since we are in a graduated tax system, there are brackets of incomes taxed at increasing rates for higher incomes. Come November or early December, sit down and estimate what your total taxable income will be for the year and subtract that number from the lower range of the next bracket. This equals your unused bracket amount.
Now here’s the part you won’t like. Recognize more ordinary income up to the limit of your unused bracket amount. How? Withdraw from your IRA or build up in an annuity, presuming you are over 59½ (therefore not subject to the early withdrawal penalty). Another way could be by deferring a charitable contribution usually given at year’s end until the following year.
So, you say, the first tax saving tip you give me is something that increases my current gift to the IRS? Hold on.
Our premise is that marginal rates are going UP! So let’s go ahead and pay our taxes at the current fire sale rates, particularly for those of us who are targets for the marginal rate increases. From a family wealth perspective, this is the smartest thing to do.Let’s say you take the money out of an IRA and pay 32% on the margin, you can reinvest the remaining 68% in a capital gain type of asset (real estate, gold, stocks, mutual funds, Bordeaux futures, art, whatever). Left to grow in an IRA or annuity, you are compounding the problem of a growing tax liability that cannot be escaped by you or your family that can become a devastating event in the settlement of your estate.
The reinvested amount in a cap gains asset grows tax deferred also, with the ultimate tax favored presently and probably indefinitely over ordinary rates. And the beauty is that any cap gains buildup is forgiven at death through a process called “step-up”.
MAMA WAS WRONG! Mama always said, “Stanislaw, never, ever spend the principal.” And the IRS built the code around Mama’s wisdom. But Mama probably didn’t face your tax liability either.
I marvel how few people use this strategy, at least by design. This will change most people’s tax bill so dramatically that they don’t believe it for a couple of years.
It all comes down to attacking your ordinary income sources. Remember always, besides salary, nothing is worse that ordinary income. It is taxed at your highest marginal rate.
If you have non-qualified (non-IRA) portfolios made up of stocks or stock mutual funds like most people, then tell your broker to set up a series of 12 monthly systematical withdrawals from your accounts for your desired income. What he or she will do is systematically sell targeted assets to meet the distribution.
By doing this, the monthly deposit you receive will be made up of two components, capital gains and principal. Capital gains are presently subject to a max tax of 15% and doesn’t enter into the AMT trap. And so far no one is proposing paying taxes on spending principal.
Say you had a 10% cap gains layer in the targeted asset and you took $1,000 per month. Your total tax on that portion of your cash flow would be $180. That leaves you $11,820 to spend. If you had taxable bond income of $12,000, you’d hand Uncle Sam probably at least ¼ of it, leaving you $9,000 or less to spend.
Jolly good, you say, but how do I get to this amazing state of affairs? Over time. Employ this strategy when a bond gets called or you sell the office building. Always focus on reducing ordinary income and converting it to cap gains.
I’ll flesh these and a whole string of powerful tax-saving concepts out in our newsletters. But you’ve got to sign up for the newsletter. For now, I just want to get your attention that there is substance here and that you can truly benefit from these ideas. In other words, as we’ve said, they’ve given us the playbook. Let’s start using it to beat down your tax liability.
Here’s one more parting piece of advice:
If you give stuff away to charity, stuff like clothes (my wife is the most charitable person on the face of the planet when it comes to giving away barely worn items from her closet on the way to the mall), or things you just don’t use anymore, get Intuit’s ItsDeductible®. It 's a
FREE online service. You won’t believe the values they legitimately assign to your items. You just take pictures of the whole bundle you give away, attach it to the output and there’s your support for an audit. You’ll be shocked how much you can deduct. There is no limit on this type of charitable giving deduction.