An Effective Strategy for Reducing Taxable Income
Reducing taxable income requires you to adopt an effective strategy sooner rather than later. Get tips on an effective strategy for reducing taxable income with help from a certified financial planner TM professional with over a decade of experience in wealth management in this free video clip.
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Hi, I'm Samantha Fraelich, a Certified Financial Planner Professional, and I'm here today to give you some ideas for how to reduce your taxable income. While many of us know that there's standard deduction that the IRS allows us each year for our tax return, we may not think to possibly itemize deductions. Even if you are not self-employed, that doesn't mean that there aren't un-reimbursed business expenses that you might be able to deduct or medical expenses if they exceed a certain percentage of your income. Talk to a tax advisor and see if itemizing your deductions might make sense in your situation. Another very basic way is if your work at a place where your employer has a retirement plan. Maximize your contribution for your retirement plan, especially if they offer a match. This is the only free money anyone's going to give you in your life, unless you have wealthy relatives which we can all be so lucky. So, look into what the retirement plan options are at your employer and try to maximize those. If you don't have a retirement plan through your employer, you can always setup an IRA account which is an Individual Retirement Account. Every year the IRS sets a limit as far as how much you might be able to put into each IRA account. If you have a spouse and they're not working, you may even be able to make a contribution into what's called a spousal IRA account. Again, those amounts change every year according to the IRS, so be sure to check and see what applies for this year. Besides looking into itemizing deductions, if you're an investor, there are a few different instruments you can use to help reduce future taxable income. For instance, deferred annuities may make sense. These can tend to have additional charges than other types of investments, so be sure to talk to a financial advisor about it if it's appropriate for you or not. Besides looking into itemizing your deductions instead of just taking the standard, the other most basic way you can reduce your taxable income is to maximize your contributions to a retirement plans. If you're employed, you probably have an employer that offers a 401K plan. If you work for the government, a school or a charitable organization, they may offer what's called a 403B retirement plan. You can take money out of your paycheck every week or every month, however you might get paid and you can make a contribution into that retirement plan. This is taking that income off of your W-2 and allowing you not to have to pay income tax at whatever funds you contribute to these retirement plans. If you don't have a retirement plan offered through your employer, you always have the option to setup what's called an IRA account. This is an individual retirement account, but there are IRS limits as far as how much you might be able to add each year. Keep in mind that it may not be deductible if your income also exceeds a certain level. Be sure to check IRS charts or talk to a legal advisor about what you can do in your individual situation. If you're an avid investor and you're getting those 1099s with lots of taxable income from your investments, here are a few items you may want to talk to your financial advisor about. The interest and income that is created from municipal bonds are free from federal taxes. There's another investment called a deferred annuity and there are many different types and not all are appropriate for everyone. So, talk to a financial advisor about whether a deferred annuity maybe appropriate for you. The advantage of deferred annuity is that every year, whatever growth you have in your annuity contract, grows tax deferred and you don't pay taxes until you take it out later on. Hopefully you can wait 'till you retire and you're in a lower income tax bracket. Another idea you may want to look at is if you have Roth IRAs, any withdrawals from your Roth IRA are tax-free. If you have multiple investments and a taxable investment account, be sure to be wary of when you're selling those investments. If you hold them for at least a year, you pay a capital gains tax rate which is typically much lower than a short term capital gains rate. In 2012, the short terms' capital gain rate is ordinary income tax rates. If you hold it for longer than a year, you typically only pay 15 percent gain. However, this is slated to go up in 2013, although no one knows what Congress will do yet. Be sure to talk to a tax or legal advisor about what the rules are each year because the IRS can change these any time. While we all dread having to file our taxes, there are ways to reduce the taxable income that we have to pay on. So, be sure to talk to a tax or legal advisor about what may make sense for your situation. I'm Samantha Fraelich, and I hope that this helps you next time tax time goes around.