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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 For instance, he/she might have withdrawn or moved funds from a certificate of deposit before it matured.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.