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Reduce your 2007 taxes

March 24th, 2008 at 11:29 pm

While many opportunities to reduce your 2007 taxes ended on December 31, there may still be some last minute steps for lowering your taxes. If you qualify, taking the following actions by April 15 can reduce your current or future taxes.

1. Fund your IRA – If you are under 70 ½ years of age, have earned income and are not covered by a company retirement plan, you may contribute to a traditional IRA the lesser of your earned income amount or $4,000 ($5,000 if you are at least age 50). The IRA contribution is deducted from total income, which lowers your Adjusted Gross Income (AGI).

If you are in the 25% federal income tax bracket, your income tax savings (combining federal and state taxes) for a $4,000 contribution is almost $1,200. Since the after tax cost for this investment is approximately $2,800, you receive an immediate investment return of 42% on the $4,000 contribution.

Even with a company sponsored retirement plan, if Modified Adjusted Gross Income is under $52,000 ($83,000 for a joint tax filer), your IRA contribution is fully deductible.

2. Fund a Spousal IRA - Are you aware that if your spouse has no earned income, he/she can still contribute up to $4,000 ($5,000 if at least age 50) to an IRA for 2007?

With a Spousal IRA, if either spouse has earned income, both spouses may be able to fully fund a tax deductible IRA. Even if the income earner has a company sponsored retirement plan, the spouse may contribute to an IRA.

If the Modified Adjusted Gross Income (MAGI) on your joint tax return is less than $156,000, the Spousal IRA contribution is fully deductible. If you or your spouse has little or no income, be sure to fund a Spousal IRA.

All IRA contributions grow tax-free until your required withdrawals begin at age 70 ½. If you qualify, fund a traditional IRA by April 15.

3. Fund a Roth IRA – You may contribute $4,000 ($5,000 if at least age 50) to a Roth IRA for 2007, if your AGI is under $99,000 ($156,000 for a joint tax filer). However, the maximum contribution is reduced by any contribution that you make to a traditional IRA.

While funds contributed to a Roth IRA do not immediately reduce your taxes, the contributions will grow tax free and are not taxed when they are withdrawn.

If you hope to leave any assets for your kids, Roth IRAs are perfect. Your children can roll them into an inherited Roth IRA and make withdrawals based on their life expectancy. With this approach, Roth IRAs can provide decades of tax free growth.

If you are over age 70½ or you are covered by a company retirement plan and your MAGI is over $52,000 ($83,000 for a joint tax filer), you may only contribute to a Roth IRA. If you cannot fund a traditional IRA, but qualify for a Roth IRA, be sure to fund it by April 15.

4. Fund a Health Savings Account (HSA) – If you had a qualified High Deductible Health Plan (HDHP) throughout 2007, you can contribute $2,850 to an HSA for an individual health plan or $5,650 for a family plan. You may contribute an addition $800, if you are age 55 or over. For tax payers in the 25% tax bracket, the $5,650 HSA contribution costs only $3,975 after federal and state taxes, providing an immediate 42% investment return.

With an HSA, you may use funds to pay current medical bills or you can invest the funds for long-term, tax-free growth. By investing the HSA funds until retirement, you will have years of tax free growth and can withdraw all of the funds tax-free for medical expenses. The HSA funds could pay for most, if not all of your medical expenses during retirement.

Other savings plans that can be funded between now and April 15 include a SEP IRA, if you are self employed, and a Coverdell ESA for you children’s educational expenses. If you qualify for any of these plans, contributions by April 15 can save on taxes, either now or in the future.

The Stimulus Scam

February 20th, 2008 at 02:16 am

Congress recently approved the “economic stimulus package,” which will provide every single tax filer with adjusted gross income (AGI) of $75,000 or less with $600 and every joint filer with AGI under $150,000 with $1,200. If you have dependent children, you get an additional $300 for each dependent child.

The reason for this program is to get us to spend the funds to help “revive” the US economy. From my perspective, the long term results of this program will not revive the economy, but will serve to put our country deeper in debt.

As one pundit has stated, this should be called the China economic stimulus package. Much of the $150 Billion of additional long term debt that this “stimulus” provides will likely be purchased by the Chinese or other foreign entities. Thus, additional government resources (which come from you and me) will be required to service this debt.

As an added benefit to China, if the money received is spent at WalMart, Target or other large retailer, it will be used to purchase goods that are manufactured in China, increasing our trade deficit. Some “economic stimulus” this program turns out to be.

OK- so our elected officials are scamming us in order to “buy” more votes – what else is new? However, we can take this lemon and make it more palatable.

Here is what you might consider doing. If you have any credit card debt, use the funds that you will receive to pay it off. If you already pay off your credit card in full each month, take the money and use it to pay down some of your mortgage or put it in one of your savings accounts. In 20 years, the $1,200 will be worth over $6,000, if your investments return 8% annually.

We can never keep our elected officials from doing things harmful to our economy, but we can minimize the damage that they do. I hope you will use this “stimulus” to increase your financial abundance.

It’s Now or Never

December 27th, 2007 at 11:17 pm

As 2007 comes to a close, your still have time to take actions that could save you taxes either now, or in the future. Some ideas to consider include:

1. Last minute charitable gifts. If you use a credit card to provide a gift to a charitable organization, as long as the charge is made by December 31, you may deduct the charitable gift in 2007. This allows you to take a year end tax deduction without paying for it until 2008.
2. Roth conversions. If you have an IRA and a Roth IRA with the same brokerage house, they can usually make an immediate conversion from on account to the other. If your income was lower than usual in 2007, you may find that a Roth conversion is in your best interests. If so, this must be completed by December 31.
3. Capital losses. If you have stocks or mutual funds that have experienced a loss since you bought them, you may want to sell them by December 31. The loss can offset realized capital gains and may be used to lower your total 2007 income by up to $3,000.
4. If you have a large estate and are worried about paying “death taxes,” provide year end gifts of up to $12,000 ($24,000 for a couple) to your heirs. Your family members will appreciate receiving the gifts now and you will keep these gifted funds from possible future estate taxes.

If any of these ideas are appropriate for you, do them now, before the year ends and you have missed the opportunity.

Flexible Spending Accounts

December 7th, 2007 at 10:32 pm

If your company offers a Flexible Spending Account (FSA), consider signing up for it in 2008. With an FSA, you request a “salary reduction” to fund the FSA. The FSA funds can be used to pay for qualified medical expense and/or for dependent care. Dependent care is usually used for child care expenses, but may also be used for adult day care for senior citizen dependents, such as parents, if they live with you.

The advantage of using FSA funds to pay for qualified expenses is that the amount used to fund your FSA is not subject to federal, state or payroll (FICA) taxes. If you are in the 25% federal tax bracket, with a state income tax of 5% and a payroll (FICA) tax of 7.65%, you will effectively be able to buy your health care and dependent care services at a discount of 37.65%.

The maximum funding amounts allowed by the IRS are $5,000 for medical care and $5,000 for dependent care. Assuming you are in the 25% federal tax bracket and have 5% state taxes, $10,000 total funding would yield a tax savings of $3,765, providing a 37.65% “discount” on the purchase of these services.

Be careful not to overestimate your FSA requirements. Any funds remaining in your FSA, at the end of the benefit coverage period, will be forfeited back to the company.

Save Taxes With a Roth Conversion

November 23rd, 2007 at 07:12 pm

As 2007 comes to a close, now is the time to decide on strategies that can save on taxes, either now or in the future.

If 2007 has been a year in which your income is lower than your normal income and if you will have significant “Schedule A” income tax deductions, you may want to consider converting some of your traditional IRA funds to a Roth IRA .

Using your 2006 tax return as a guide, determine your approximate 2007 income. Reduce your income by contributions made to your Health Savings Account, IRA contributions, self employed health insurance and 1/2 of any self employment taxes paid. The remainder will be your approximate Adjusted Gross Income (AGI) for 2007.

If your AGI is over $100,000, you are not eligible to make a Roth conversion in 2007.

If your AGI is under $100,000, determine what your approximate “Schedule A” itemized tax deductions will be in 2007. Schedule A includes home mortgage payments, medical expenses, charitable gifts and state and local taxes plus any property taxes.

Your next step is calculate exemptions by multiplying your total number of claimed dependents (including yourself) by $3,400.

Subtract both your approximate Schedule A deductions (or the Standard Deduction, if that is greater) and your exemptions from your estimated 2007 AGI. The remainder is your approximate 2007 taxable income.

As a single filer, subtract your taxable income from $31,850. The remainder is the approximate amount of your IRA holding that you can convert to a Roth IRA at a 15% tax rate.

As a joint tax filer, subtract your taxable income from $63,700. This is the approximate amount that you can convert to a Roth IRA at a 15% tax rate.

Once you have converted IRA funds, they will grow tax free until they are withdrawn. When they are withdrawn, the withdrawals will also be totally tax free. The small amount of taxes that you pay now will keep you from paying significantly more in taxes when you retire.

There is one caveat. This approach should only be used if you have adequate non-IRA savings to pay for the increased taxable amount. However, if you are able to pay the increased taxes, your long term tax savings can be significant.

2007 Roth IRA conversions must occur before December 31, 2007. If this approach may be appropriate for you, do your homework now, so the conversion can be completed before the end of the year.

Taxing Times for Your Home

October 31st, 2007 at 11:40 pm

Congress is looking for ways to raise taxes and your homes are in their line of fire.

On September 27, the Wall Street Journal reported that the House’s Ways and Means Committee has approved a bill under which homeowners facing foreclosure will not get a tax bill, if part of their debt is forgiven by lenders. Presently, forgiven debt is treated as taxable income to the borrower.

To pay for this tax break, the committee decided to eliminate the ability to sell your second home and pay no capital gains taxes on up to $500,000 in profits, when the home is your primary residence for two out of the last five years. A full explanation of this tax break is found on page 106 of the Financial Abundance Guide.

With the proposed tax policy, the capital gains tax break for a second home would be based on the number of years that the house has been your primary residence. The longer your second home has been your primary residence, the larger will be your capital gains tax break when it is sold.

If your second home has been your primary residence for two of the past five years and you are trying to avoid capital gains taxes on its sale, sell it quickly and hope that Congress does not make this change retroactive.

The second way that your home’s tax deductions may come under congressional fire was discussed in a Wall Street Journal editorial on October 6. As part of a tax bill to reduce CO2 emissions, John Dingle, chairman of the House’s Energy and Commerce Committee, is proposing to eliminate the mortgage deduction on homes over 3,000 square feet in size.

While the probability of this measure passing is low, it portends that large, “energy wasting” homes will be a future tax “target” for Congress. If you are in the market for a new home, consider a smaller, “energy efficient” one.