It’s tax time again. While taxes are the price for a civilized society, there’s nothing in the law that says you can’t lower your own tax bill. So at this time of year, I do get questions about taxes. Most folks are looking for ways to minimize taxes. Here are 8 ways to minimize taxes. You may find one or two that work for you.
You can minimize tax liability in more ways than can be counted here. You are limited only by your imagination, the creativity of your professional team and your willingness to go right up to whatever lines the IRS has.
As noted once in a US Supreme Court opinion, tax avoidance is not illegal. Tax evasion is. Being on the right side of the line is key. There are lots of legal ways to minimize your taxes.
For some who have deep pockets and can afford to hire teams of high-priced tax attorneys and accountants, the number of creative ways found to avoid taxes can almost be limitless. But like investing, these kinds of options also come with high risks if the IRS deems the strategies to be illegal or abusive.
For most people without an entourage of professionals, there are still some conventional ways to minimize your tax liability.
The best options usually involve being self-employed or owning rental real estate. For these folks there is the opportunity to use depreciation, a calculated non-cash expense, to lower one’s taxable profits from a business or rental property. Likewise, you can find ways to legally shift income.
One way is to hire family members like a spouse or minor children which shifts net profit from your tax bracket to someone who may be in a no-tax bracket. This works especially well if you help the minor child use his income to fund a Roth IRA which gives him a head start on retirement savings and is a neat way to save for college, too.
Another option is to supplement medical expenses through a Medical Expense Reimbursement Plan (MERP) sponsored by your enterprise. Let’s face it. You were going to incur and pay those expenses anyway but through these methods you can now get a legal tax subsidy.
For those who are W2 earners, the best options relate to employer-sponsored benefits. Take advantage of any benefit that shifts income to a tax-deferred vehicle. These include employer-sponsored retirement plans, flexible spending accounts for health or dependent care.
If you don’t work outside the home but you have a spouse who does, then be sure to fund your own IRA to the max. This will help your own retirement but also reduce your current year taxable income.
If you have deeper financial pockets, you can consider investing in municipal bonds which produce tax-exempt income or in partnerships like oil and gas exploration which produce depreciation and losses that can be used to offset your other income.
While lowering taxes in the current year are what most people are now asking about, it’s also advisable to plan ahead for taxes in retirement. As you put aside money in your IRAs and company 401(k)s, you’re lowering your current tax bill. But you’ll find that Uncle Sam will be waiting to take his toll when you start taking distributions in retirement.
One way to lower your future tax bill will be diversifying where your retirement money is held. By funding or converting other IRA funds to a Roth IRA, you’ll have the option to withdraw funds tax-free in retirement or allow them to continue to grow because you won’t have to take a minimum distribution from these accounts.
Because of income threshold limits, you may not directly qualify for opening or funding a Roth IRA. But with a little bit of help, you can navigate the rules to fund a ‘backdoor Roth IRA’ which will save you money on taxes in retirement.
To really figure out your best options, you should have a plan. So, you should reach out to a qualified financial professional who knows how to integrate tax planning for your personal situation.