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Common Tax Myths to Ignore (Tax Minimization)



Doing your taxes is a tough job. With laws and rules changing with every region and year, there is a lot of confusion around how it should be done in the most efficient manner – not to mention one that is easiest on the pocket.

While there are way too many myths for us to bust in one go, we can help you with the top five tax myths that currently prevail in the world of taxes, help you get the best of your returns and avoid getting audited.

Tax myth #1 – It is voluntary to file your taxes:

Very obvious, yet one of the biggest myths to circle around the world of taxes – no matter what state you may be in, it is always mandatory to pay your taxes.

The confusion happens because people often mistakenly refer to a passage in the Form 1040 instruction book that states that the tax system is a voluntary one. While that is correct in theory, it has no bearing upon the status of paying taxes, which is as mandatory as it gets.

Tax myth #2 – Students need not pay any taxes:

A truth to some extent, students earning less than $12,000 a year do not need to file their income taxes. Those earning more than that figure, however, need to pay taxes on a mandatory basis.

That being said, if you are a student under the age of 24, your parents claim you as a dependent, and you meet certain criteria, you can avoid having to pay taxes. It doesn’t matter if you go to school full time. You need to file your income taxes.

Fortunately, there is the IRS to help with this – there is a very handy “quiz” on their website to help understand if you need to file a tax return.

Tax myth #3 – Pets can be filed as dependents

Although pets have a very special status in life (for they are loved and require a lot of investment), they cannot be filed as dependents, and therefore cannot get you a tax break.

That being said, pets can be leveraged to make tax breaks in some circumstances – for instance, if the pet in question is a service animal such as a therapy animal or a guide dog, or even a guard animal for your business (if that is applicable). Make sure that you have a detailed record related to your pet, as the IRS will require both the proof of the need of a service animal, as well as the proof that said service animal is trained to help you.

Tax myth #4 – The accountant is responsible for filed tax errors

To err is human – and something that’s applicable even to accountants and financial experts. Even the finest of experts can sometimes make a mistake and that could potentially result into you getting audited.

You heard that right – even if it is your accountant who makes the mistake, it is you who will be on the hook. The only way you can avoid this from happening is by making them double check their work, and then potentially double-checking it yourself.

Tax myth #5 – Your “home office” gives you a deduction

Your company may have a flexible policy allowing you to work from home on some days. You may even be a full-time remote worker. But that does not mean that you will be eligible for tax deductions.

In order for your workplace to be eligible for a tax refund, it must be available for exclusive and regular use, and must be the principal place of conducting business. Therefore, not should your office be exclusively for work, it must be the place where you would conduct all of your business activities, including (but not limited to) in-person meetings with clients and/or customers. You can only add your home office as a refund if it strictly meets these requirements.


Saving for Freelancers (Retirement)



Living the freelancers’ life is the dream for many – the ability to be your own boss, set your own working hours, and achieve a higher level of work-life balance. And with over 36% of the American workforce engaging in some or the other kind of freelance work, the gig economy is indeed going from strength-to-strength.

That being said, the working for the gig economy also comes with its own downsides, most of all being the lack of any kind of employer-sponsored benefits and retirement accounts like the IRA or 401(k). Having a clear absence of such a structure makes it very difficult, if not impossible to save for retirement in a clear-cut manner.

With the right perspective, however, this supposed weakness can easily be turned into a strength. Whilst you do not have a solid employer-sponsored 401(k) as a freelancer, you are your own boss and do have the flexibility to make a lot of choices the average employee couldn’t. As a freelancer, you can (and should) take advantage of the options that you do have and can use to save for retirement.

Here are some common investment accounts that you can use to save for the future as a freelancer:

Traditional and Roth IRAs

Individual Retirement Account (IRA) allow individuals to set aside part of their savings for their retirement. As a freelancer, you can choose and work with either of a traditional or a Roth IRA, or even a plan that combines the two. Those aged 50 or less can deposit up to $5,500 into a traditional or Roth IRA or a combined plan. Those over 50 can deposit an extra $1,000.

Any money that you deposit into a traditional IRA is pre-tax, so your savings will be subject to tax when you withdraw them during retirement. Roth IRA, on the other hand, requires you to pay the taxes on the money before you deposit it, making the withdrawn money tax-free.

Opening an account is easy – you can easily do it online through a broker, such as Betterment, Vanguard, or Fidelity.


A Simplified Employee Pension IRA (SEP IRA) is a retirement account ideal for those who make their living as freelancers. In this plan, workers can add either of $55,000 or 25% of their net earnings – whichever turns out to be the lesser – annually. Accounts can be set up with online like with a traditional IRA, and contributions can be easily deducted.

Solo 401(k)

As the name implies, a solo 401(k) is exactly that – a 401(k) account for a single person. It is similar to the traditional 401(k) in the sense that you can deposit up to $18,500 into the account ($24,500 if you are 50 years old or more), but given that you act as both the employer and employee, it is possible for you to make additional contributions as an employer, and therefore boost your total contributions. Subject to your income and IRS calculations, the total amount you can add becomes up to $55,000 per year.

Make sure to open your account by December 31st of the year in which you intend to contribute – for instance if you want to contribute for 2019, you have to open your account before or on Dec. 31, 2019.

How much should you save for retirement?

The amount one needs to save for retirement is different for everyone as it is based upon various factors such as age, debts, saved money and assets, and current income. That being said, a general rule is to save around 10% to 15% of your income in a retirement account at the very least. The more you can increase the percentage, the better it will be.

Another factor that is you must consider before embarking on saving for retirement is debt load. If you’re among the freelancers who have high-interest loans (like soft loans or pending credit card bills), you should first concentrate on paying-off and neutralizing said debts before you begin to save. This is because the annual interest you would be paying on said loans would be greater than the returns you would be receiving from the retirement savings.

On the flip side, if you have low-interest debts (like federal student loans or mortgage), you should start saving for retirement right away, whilst making sure than you are also paying your loan debt(s).


Estate Planning for Wealthy Families

Estate Planning for Wealthy Families


One of the best and most essential things a family with wealth can do to protect and grow their wealth is to create a solid financial estate plan. According to a 2014 report by Vanguard, seeking an advisor to build a financial estate plan is one of the top three services sought by affluent families (besides implementation of tax-advantaged strategies and planning for long-term care).

In such situations, a good plan makes all the difference – not only will it cover the goals the family wishes to attain, it will also keep searching for areas to improve in, and when necessary adapt to changes and include new situations.

Here are some estate-planning tips that you can use to protect and grow the wealth that belongs to you and your family:

Minimize your taxes:

While planners are the best at doing what they do (provided you’ve done your research and hired a good one), they are usually not the most knowledgeable when it comes to tax matters. It is, therefore best that you consult a tax lawyer or accountant who can help you minimize your taxes as much as possible before you begin the process of building your estate plan. Tax lawyers work with estate planners and advisors to review areas where benefits can be maximized through conducting an early division of assets.

Add a life insurance plan:

Making the addition of a life insurance plan into the financial one has more than a few benefits. For starters, it works as a great way to manage tax and risk-related expenses within corporations. Secondly, it serves as a handy tool for families that have high spending rates but wish to leave a certain estate value behind with as few tax litigations as possible.

Take your family structure into account:

Usually, families that are more affluent and wealthy than others tend to have a more detailed and complicated asset structure. This is at least partially because of the fact that many of said assets get implemented in an ad hoc manner over a large period of time, with the hiring of multiple tax lawyers and/or accountants.

Generally, creating a uniform family governance plan will help formalize the structure into a clean, solid shape. This would help make the financial structure more efficient and accountable and reduce costs tremendously. The factors to be taken into account here should be the formal setting out of family members’ roles and responsibilities, and a thorough calculation of the required outside expertise (such as investment, legal, and accounting).

Make your will early – and review your will regularly:

Quite surprisingly, it is a known fact that people tend to not make wills unless they cross a certain age. To most people who are young, making a will and an estate plan is a waste of time, money and personal involvement.

In reality, however, the only person who can validate the truth of the matter as an estate planner. With solid estate background and experience (from practical experience to memberships of prestigious organizations such as of The Society of Trust and Estate Practitioners (STEP), planners will be able to map out a procedure and summarize the areas that needs the attention of a lawyer. Undertaking this process when you are young – and reviewing it regularly will help you stay organized, fulfill the current financial needs of you and your family, reduce otherwise unnecessary legal bills, and make sure that the a well-formulated will exists, capable of handling any and all situations.

Allocate your investments:

Last but not the least, you must integrate all of the above into designing and building your investment portfolio, in accordance to the Investment Policy Statement. Doing this can require some initial heavy lifting, but it will be worth it when you are relieved that a solid estate plan is in action.

To allocate your investments fairly, make sure than the investment assets are well-diversified, yet dynamic enough to be easily changes with changes in the family structure.


The Small Business Owner’s Guide to Minimizing Taxes

The Small Business Owner’s Guide to Minimizing Taxes


Running a small business is tough, especially since you have to make sure that the cashflow is smooth running at all times. One of the biggest obstacles of a smooth running cashflow is running tax amounts. While taxes are indeed mandatory (and a legal obligation), you wouldn’t want to pay more tax than you absolutely must.

Here are some tips to help you plan and minimize your taxes as much as possible:

Utilize the $20,000 immediate asset write-off: In the 2015 Budget, the Federal Government announced that all small businesses which make a certain could avail an immediate deduction for purchasing assets that cost lower than $20,000, thus replacing the previous threshold of $1,000. To be eligible to avail this benefit, you must make sure that your assets are already installed and ready for use by the right time. In the event that you either do not need or cannot afford any assets (due to low cashflow), you still can avail an immediate deduction by writing-off the balance of a small business pool that has a written down value of below $20,000.

Increase your superannuation contributions: Planning for the future is a very instrumental factor for small business owners. One major factor at play in this regard is superannuation – something that you must definitely pay attention to. During the process of maximizing concessional contributions, make sure to includes the compulsory 9.5% in the limit, and ensure that every payment is received in the super fund before deadline.

Cover your expenses with prepayments: One of the best methods of maintaining a good cashflow situation is to cover expenses via prepayments. By making prepayments of at least $1,000 (within 12 months before the deadline), you can help your business become eligible for deductions. Prepayments under $1,000 are deductible as well and need no service period.

Consider Capital Gains Tax event timings: In the event that you are trading as a trust or an individual, you must check if you are eligible for the 50% General Discount for proposed asset disposals. You may also be eligible for other small business discounts and concessions, like Rollover Relief or Active Asset. In order to be eligible for these, you must have held possession of the asset for a minimum of 12 months.

In the event that you intend to dispose-off an asset, you must first consult with your tax adviser. The tax adviser will help you understand the ramifications and consequences of transactions involved in disposing-off assets, and help you become aware of any concessions that you may be able to avail.

Write off any bad debts that have no possibility of being collected: If you are amongst the many small business owners who pays on accruals basis and has considerable debts to repay, you must consider sorting them out and writing them as much as possible before the end of the fiscal year in order to make sure that you can claim a tax deduction in the new one. During the process of writing-off bad debts, do ensure that you are following the protocols that determine whether debt is really bad, and that you have taken the required steps to collect said debt.

Write off any stock that is obsolete: Any stock that is dead and obsolete is nothing but a liability on your record. Make sure that you avoid having such stock actively present on your records by conducting a stock take before fiscal year end, and write-off any that you find obsolete. Not only will you get a cleaner record, you will also have a reduced amount of tax liability.


Investment Tips for Small Businesses



Owning and operating a business is no easy task, especially when the cash flow is on the low. While determination, talent and skill can and do make a difference, they are alone not enough to running the business at its best – as a business owner, you need to keep your finances running as well.

One of the best ways to keep yourself from getting shorthanded in the financial department is to invest in other areas. Here are some tips that can help you get started:

Invest in Penny Stocks

Basically, a penny stock is a common stock that can be bought from the market for less than one dollar. While it isn’t the most stable form of investment, it is a worthwhile one – especially for new investors – due to the extremely low amount that is required to invest. If you are new to investing, investing in penny stocks can help you nurture your skills as a beginner investor until you get used to it. Once you are accustomed, you can either experiment with more penny stocks or practice with other, more heavier types of investments.

Make Sure that your Investments Line-up with your Business Goals

To make the best from investments, small business owners must consider how their investments align with the business. As a small business owner, you must keep in mind that the whole goal of investing is to enhance the income earned by your company. You must know that in the event the investment does go south, you will end up losing the money invested, and in some cases may even end up with some kind of liability yourself. Such a situation is difficult to recover from.

While all situations can never be predicted, one can plan well to keep things from going south. For starters, before you make any sort of speculations, you must consolidate your business goals, planning, credit, and financing, and always make sure that the investment you make does not put the core of your business into any kind of dilemma. Additionally, you must always have an informed opinion and never treat investment as anything close to gambling.

Make Investments in Multiple Places

Making investments in multiple places has a very key benefit. Not putting all of your eggs in one investment basket protects you from having to suffer great losses in case any one of your investment ventures fall out. For instance, if a particular stock devalues, you will continue to gain profits from other stocks.

Invest in Mutual Funds

Every investment you make has a certain level of risk and return, and there must be a level of equilibrium between the numbers and overall experience of the investor. If you’re among the small business owners who are only starting out, you are better off making investments with a lower amount of risk. And that’s where mutual fund investments come in.

Large-sized mutual funds have hundreds of stocks that are combined in a single place, with a fund manager who adds money to the fund in order to increase its growth rate. In investments like these, the level of risk is very low, making it a suitable opportunity.

Don’t Use Leverages

While leverages do have a tendency of increasing your profits, they have an equally high chance of diminishing them as well. This makes it much like gambling, which is always bad news for you and your business. In case things do go bad (which happens when you do use leverages), the broker could issue a margin call, which would then need you to invest extra cash to level the deficit even.

Minimize Taxes and Fees

The process of selling and trading in a market often comes with hidden fees and taxes that you must consider, especially as a small business owner. If you don’t track these and keep them under control, these fees will climb up to as much as 30% of all profits, thereby making the whole purpose of increasing cash flow useless. Prior to making investments, you must take a close look at the taxes and fees involved to determine whether the fees are worth for the amount of risks you take.




As of late 2007, Baby Boomers began collecting their Social Security payments, marking the beginning of an interesting time when there will be a long list of them in the retirement age. Due to their size alone, they form a demographic category that has more total spending power than anyone else on the globe, which in turn makes their investing and spending power very impactful on the U.S. investment landscape and the economy overall.

Those approaching retirement must keep in mind that the choices they you make today will affect what their financial status will be 20 years (or more) down the line. This is the minimum one can expect, given that the average life expectancy for the baby boomer has been calculated as 83 years.

Here are 5 best investment strategies that you must consider:

Variable Annuity (VA)

Believe it or not, the value of insurance become more important as you approach your retirement age. While traditional whole life policies still remain, there now exist some newer, more updated theories and products which have garnered enough attention to make their own place. One such product is the variable annuity, which permits investors to sign up for what is very much like an insurance policy, the only difference being that the balances can be invested into bonds and stock holdings.

Variable Annuities allow holder to gain on cash balances above inflation, which is a key factor in keeping your insurance’s value. That being said, it is always better to be safe, and select a variable annuity with restraint, given that fees for each type tends to be very different. Also make sure that you understand every fee that you are paying, from annual fees and underlying investment fees to front- and back-end sales fees.

U.S. Treasuries

U.S. Treasuries actually make up for the sole investment for many retirement-aged individuals. With yields that are regarded as a benchmark of safety (the risk-free rate of return), treasuries make for a very safe and reliable investment, especially when the odds are risky. All treasury bonds are controlled by the U.S. government, which has so far not defaulted on a single Treasury bond. No matter how you access exposure to Treasuries, from individual bonds and mutual funds to exchange-traded funds, and others, they lend a lot of weight to your overall portfolio.

For those above 60 years of age, capital preservation is much more essential than capital appreciation. Not only do treasuries offer this, they also offer a steady stream of income and a chance for you to preserve your assets during inflation. While municipal and corporate bonds are sold in the same manner, they tend to have higher default rates and require more research to be done by the investor for evaluation of merits.

Certificates of Deposit (CDs)

CDs stand only second to Treasuries thanks to their high yield (which often goes higher than that of Treasuries of the same maturity), as well as the feel-good factor of giving your hard-earned money to an established financial institution like a bank. Plus, there is the Federal Deposit Insurance Corporation (FDIC) insurance. The only thing there is to remember here is that there is a threshold of $250,000 per bank, since the FDIC insures a specific limit to individual account holders. If your amount is greater than this, you will have to spread your money over several different banks.

Real Estate

As with any demographic, real estate is an investment that pays well if done wisely. As someone approaching retirement, there are many avenues you can explore: from buying a second property and/or rental property, to converting from a paid-off mortgage to a smaller but more efficient home. Many people actually enjoy moving to a smaller home and/or a new location. These options will help provide asset diversification and help you save on taxes, as well a offer you a place where you can spend that much-deserved extended vacation-time.

You must keep in mind to not take such decisions lightly though, and must consider consulting a certified advisor before you actually decide to embark on a decision. After all, there is a lot that needs to be considered here, from your net-worth diversification and liquidity needs to your finances and personal tax situation. Plus, if you opt to keep a rental property, you will yourself have to put some work and effort behind it.

Individual Retirement Account (IRA)

It is virtually impossible to make a best investment strategies list that does not have this option, and for good reason. In fact, if you’re one of those who has been investing for years, you probably have a well-funded IRA already. Once you retire, your 401(k) assets will roll over to either a Roth or a Traditional IRA. And in case you’ve crossed the age of 50, you can add more than your standard annual contribution limits to your account. IRAs make a particularly good strategy, since they have the ability eliminate capital gains taxes and reduce your future tax bills significantly.

Both the Roth and the traditional IRA have their own advantages. While asset transfers to a Roth IRA are not tax-deductible (meaning you still have to pay income taxes), the income that you will go on to receive will be completely tax-free. Furthermore, the assets in your IRA must reflect your overall asset allocation.

Special Mention: The Wild Card

Yes, we mentioned five investment strategies. But we decided to include this spot for those who apprehensive of spending 20+ years sitting around having nothing to do. While good investment ideas do involve careful financial planning, they also sometimes (if not always) involve (being creative and following your passion). In fact, any one of your hobbies can function well as an investment opportunity. This includes several activities such as:

  • Starting your own business
  • Classic cars
  • Paintings and fine arts
  • Coins and collectibles
  • Sports memorabilia

That being said, you must be well aware that these too have their boundaries. After all, there is no point in starting a business which will keep you so busy that you finally get in way over your head. However, if there is something you are truly interested in – and preferably have good knowledge about it, you must not hesitate to take it further, now that you will enter a phase in your life when you actually will get the time to do so. We do live in a world that is brimming with possibilities and age is really just a number. So long as you stick to putting a fixed percentage of your net worth (a maximum of 10%), you will be completely fine.

To Conclude:

Now that you are approaching retirement, the choices you make can and will affect how you will be leading your lifestyle for decades to come. You must, therefore, make sure to properly think about what you need, set your goals, and then set about selecting the best strategy (with the help of a professional) to achieve said goals.



While retirement does mean no work, you still must pay your taxes. Unsurprisingly, paying taxes can get tricky during a time when you’re not actually working, and instead are relying upon savings (which no matter how large, is still limited). It is therefore essential for you to estimate the taxes that you must pay, and plan your budget accordingly to avoid any inconvenience later.

Taxes during retirement work the same way as they would when you work, i.e. calculated on the basis of your annual income. Every source of income is taxed differently, which is why it is a good practice to have sound knowledge of the various nuances of tax rules.

The following are the most common types of retirement income and the various tax rules for them:

Social Security Income

If Social Security as your sole retirement income source, you will probably not have to pay taxes in retirement. If you have income sources other than this, however, then at least a part of your Social Security income will probably be taxed. The amount of tax determined is based upon a formula, can vary from zero to 85%, depending on your additional sources of income. Other income sources are termed as “combined income” by the IRS, and this combined income is plugged into a formula in your tax worksheet which will determine the percentage of your benefits which will be taxed annually.

Usually, retirees with large amounts of monthly pension will pay up to 85% from their Social Security benefits, and will pay their total taxes at a rate of 15-45%. Retirees relying only Social Security mostly get their benefits tax-free.

IRA and 401(k) Withdrawals

Generally, retirement accounts withdrawals are during retirement. This includes both IRA withdrawals and withdrawals from plans like 401(k), 403(b), and 457, among others, all of which are reported as taxable income on your tax return. The percentage of benefits that you must pay as tax will depend upon a combination of your total income, your deductions and the particular year’s tax bracket. For instance, if your year has more deductions than income (say, for instance, if you spent a lot on medical expenses), you might be exempted from paying any tax on withdrawals for that particular year.

Roth IRA withdrawals, if done properly will be tax-free.


Pension income is generally taxable. The best way to determine the tax on your pension is to use a simple guideline – if the withdrawal goes in before tax at the time of withdrawal, then it will be taxed. Since most pension accounts are funded with pre-taxed income, all of the amount will be written-off as taxable income each year on your tax return. In such cases, you can ask for your to be deducted from your pension check.

Annuity Distributions:

IRA or retirement account-owned annuities are taxed on the basis on tax rules in the section on IRA withdrawals. If the annuity was purchased with the help of money that was not within an IRA (or any another retirement account), then the tax will apply based on the kind of annuity purchased.

In case of immediate annuity, only a certain portion will be considered interest, and only this portion will be included in the taxable income section of your return. The annuity company will inform you of your “exclusion ratio” i.e. is, the amount of annuity income which will be excluded from the taxable income.

As for withdrawals variable or fixed annuities, the earnings need to be withdrawn first. This implies that if the account is worth more than your contributions, you will initially withdraw earnings or investment gain, which will be taxable. Upon withdrawing all your earnings, you will be withdrawing the original contributions, i.e. cost basis, which are tax-free.

Investment Income

Investment income works the same way as dividends, capital gains and interest income, by being reported on a 1099 tax annually. It is sent directly from the financial institution where your accounts are held. If you are systematically selling investments to generate income during retirement, every sale you make will generate a long/short term capital gain (or loss), which will subsequently be reported on your tax return. Taxes are nullified only when the other sources of income are not very high.

Selling your home

If the home you are selling has been lived-in for a minimum of two years, you have a high chance of not having your home taxed unless your gains are more than $250,000 (in case of a single person) or $500,000 (in case of a married couple). Renting homes have more complex rules, and tax calculations for the same require the expertise of a tax professional, who will help you determine the amount of gains which need to be reported.



Believe it or not, planning your ahead in time can helps you manage them efficiently once you have retired. In order to do so, you must have a thorough understanding of the various options that are available to you. Once you gain this understanding, you will be able to choose the right strategies which will help you keep your tax bill as less as possible. With the right decision, retirees can gain some control over their taxes thanks to the ability to being able to decide the amount that they need or want to withdraw from their retirement plans.

Here are a few tips to help you get started with planning your tax strategy:

  • Exemptions and Deductions: Make sure to take complete advantage of all personal exemptions and/or itemized or standard deductions. These will help you determine the amount of your income that should be tax-free. For retirees, taxable distributions can be coordinated with their medical expenses, property taxes and mortgage payments.
  • Increase your Retirement Contributions: This can be particularly useful if you have multiple available deductions. You can try withdrawing more retirement funds than when is necessary in a given year once your deductions exceed the taxable income. This will help you avoid paying extra taxes in the next year(s) which could have a low or even zero tax rate.
  • Defer retirement plan distributions: By deferring your retirement plan distributions until they are required by tax law or until you need them, you can keep your taxable distributions to a minimum, and therefore push your income to subsequent tax years. Taxpayers who wish to go with this plan should start withdrawing funds from their traditional IRA plans and 401(k)s once they reach the age of 70 1/2. Distributions should start by April 1 of the year next to the year in which the taxpayer turns 70.5 years; this is known as the “required beginning date.” You can calculate the minimum amount to be distributed by dividing your account balance by the life expectancy figures published by the IRS in Publication 590. To make things easier, you can try web-based calculators to estimate the minimum required distributions.
  • Elderly-specific tax credits: While taxpayers of and above the age of 65 are eligible for the special tax credit, actually qualifying for the same requires some careful planning, for the adjusted gross income (AGI) must be within certain limits.
  • Maximize your tax-free income: By selling their main home, taxpayers can have up to $250,000 exempted from their capital gains. If you are married, this figure will increase two-fold to $500,000. Interest that is earned from municipal bonds is also tax-exempt.

How is Retirement Income Taxed?

Retirees have a range of sources from which they earn their income, from pensions and annuities to Social Security benefits. Each of these sources are subject to a separate set of tax rules.

Social Security: Depending on your income profile, your Social Security can stand to partially or fully tax-free. While finding out where you stand does require some careful and complicated calculation, it is worth the benefits you will get in terms of less taxes and better planning.

Pension or Annuity Income: These can partially or fully taxable. Distributions will be fully taxed in the event that all contributions to your pension were made with tax-deferred dollars. However, if you have contributed any after-tax dollars for funding your plan, you can get some cost basis in the plan contract.

IRA Distributions: Depending upon the kind of IRA you have, your individual retirement account’s distributions can be fully or partially taxable, or even completely tax-free. Distributions get fully taxed when the taxpayer has a deductible traditional IRA. However, if you have any basis in a non-deductible traditional IRA, your distributions will be partially tax-exempt. Roth IRAs are mostly totally tax-free so long as you full two basic requirements, namely, your first Roth IRA should have been made at least 5 years before any distribution, and the funds should be distributed after you have reached the age of 59 1/2.

401(k) Plans: 401(k) plan distributions are fully taxable on account of the fact that these contributions were not included in your taxes when they were made. These get the same treatment as Roth IRA distributions.



With the end of the year approaching, many of you are probably already thinking about the applicable documents required to prepare your federal income-tax returns. Although most tax law provisions continue to be the same, certain key changes have been made.

It is always better for taxpayers to have a basic knowledge of individual taxation so that they can easily comprehend as well as implement tax-minimization and planning strategies. Such strategies are based upon the time in which the transactions have been made, which is why even a basic level of awareness of these can go a long way in taking advantage of available taxes. Furthermore, a well-informed taxpayer also stands a chance to ask relevant questions to his/her certified public accountant.

Above-the-Line Deductions:

Reported on Form 1040’s first page, these deductions are taken away from the gross income – the resultant calculation being the very-essential “adjusted gross income,” or AGI figure. These deductions are generally very helpful since they are calculated on the basis of the extent to which they cross the AGI percentage. Additionally, some other tax benefits phase-out at specified AGI levels. It is therefore only natural for taxpayers to want to take absolute advantage of any above-the-line deduction that they can get. Such deductions include (but are not limited to) tuition, interest for student loans, penalty on early withdrawal of savings, moving expenses, expenses for educators and deductions for retirement contributions.

Contributions to Retirement Plans

Generally, taxpayers experience a circumstance or event which makes them eligible to get an above-the-line deduction. For instance, he/she might have withdrawn or moved funds from a certificate of deposit before it matured. That said, deductions related to the funding of retirement accounts are controlled by working taxpayers.

Furthermore, mutual funds’ investments in which the fund manager gets a charge of making decisions regardless of tax implications should ideally be held in a tax-deferred retirement account like an Individual Retirement Arrangement (IRA) or a 401(k).

Last but not the least, some taxpayers with low income figures may be eligible to reduce their taxes by getting a retirement contribution credit.

There are other ways to reduce taxes as well. The applicability and effectiveness of these strategies depend upon the income, resources and know-how of the taxpayer.

Some of these methods are as follows:

-If you have an appreciated asset you should consider donating the property over selling it. Doing the former will allow you to deduct the fair market value of the property as a charitable contribution, and will help you avoid any tax that you would have to pay on any capital gain you would receive from a sale. Generally beneficial for high-income taxpayers. these contributions also help them avoid the new Medicare surtax on the investment income an asset.

– Another strategy that helps in minimizing taxes is holding municipal bonds which yield interest that are exempt from federal taxation. You can also try investing in municipals if it offers a percentage yield that is more than what you would earn on a taxable investment that is multiplied by one minus your effective tax rate. Before you invest, however, you must make sure to consult your tax adviser and determine whether the alternative minimum tax works well with your investment decision(s).

– In case you are planning to sell securities which will ultimately generate a loss, try to execute those sales in the financial year in which you stand a better chance of getting long-term capital gains from other items. Long-term capital gains, here refer to the gains that result from sale of capital assets which have been held for longer than a year. It is possible to reduce your capital gain (and by extension, your AGI) by applying up to $3,000 from any loss. Any unused capital loss can be brought forward to the next tax years and thereafter applied to the offset capital gains.

– Beware of “wash-sales” when you plan to hold a security for a year or less than that. A wash-sale takes place when you sell a security at a loss, only to buy similar securities within a month before/after the sale. Not only will the loss be disallowed during the sale, the disallowed amount will be added to the cost of the second purchase. All said and done, a wash sale can prove to be beneficial strategy if the loss can be deferred to another year.

A caveat:

For the next year, certain tax benefits for taxpayers with high AGIs have been reduced. This reduction is 2% for every $2,500, or fraction thereof, of AGI that exceeds $250,000 for single filers and $300,000 for taxpayers who are married.
Additionally, certain itemized deductions will be subjected to a maximum of 80% reduction for taxpayers with high income rates. The reductions stand at 3% for AGIs above $250,000 for single taxpayers and $300,000 for married couples.
Certain expenses such as theft and casualty losses and medical expenses are barred from the reductions. Medical expenses which exceed 10% of the taxpayers AGI, however, will be deducted.

To conclude:

Planning your taxes is an activity that requires consistent involvement on the taxpayer’s part all year-round. The simple-sounding act of maintaining organized records can go a long way in making an effective tax strategy.