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Top ten tax saving opportunities
by Tony Novak, CPA, MBA, MT
revised 10/8/2012
Note about 2013 tax planning: The tax increases scheduled for January 1, 2013 are larger than any previous year and more challenging from a tax planning perspective. We urge individuals to call to schedule a comprehensive tax planning discussion as early as possible to address these significant issues.
There are many opportunities to reduce income taxes built into the today' s tax code. Individuals who develop a financial plan incorporating a long term tax strategy and then conduct periodic tax planning reviews are most likely to realize savings. This listing below is meant to highlight the planning possibilities but is not intended to be a complete discussion of all of the details.
- Tax-free gain on the sale of a home. Up to $500,000 for married couples and $250,000 for single people. There is no need to reinvest in another house, but if you do you can rake in another tax-free gain again in a few years. This is a great way for a single contractor, for example, to increase after-tax income and net worth.
- Deduct up to 100% of income up to $205,000 for contributions to a pension plan. This is an extraordinary opportunity for high income people close to retirement age who are self-employed or work in a small business.
- Write-off of up to $100,000 of purchases used for business. This break has been nicknamed the Range Rover write-off. Even if you bought it with a 100% loan and have not yet made the first payment, the entire purchase price is immediately tax-deductible. This tax break was meant to spark economic recovery, and it seems to be working.
- 4. Receive tax-free reimbursement for out-of-pocket health care expenses. Use a Medical Savings Account (MSA) if you are self-employed or a Health Reimbursement Arrangement (HRA) if you are an employee. Even better tax-saving opportunities are expected soon using Health Savings Accounts (HSA). This should be an easy way to save $1000 per year in taxes.
- 5. Tax credit 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.
- Transfer assets to the next generation. The combination of estate tax repeal combine with standard estate planning strategies make it easy to make tax-free transfers of assets to the next generation.
- Use executive benefits to defer income. 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.
- Life Insurance owned by a trust or a business. Gains are still tax free when the policy owner and beneficiary are individuals. It rarely makes sense to waste that benefit.
- Non-cash deduction for real estate depreciation. While you watching your rental properties rise in value, 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.
- New 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.
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.
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Opinions expressed are the solely those of the author and do not represent the 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 operates as an independent adviser under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator" but 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. He has no financial position in any stocks mentioned. Novak does work as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to other companies including the companies listed in the articles on this web site.
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