It’s Your Money
Planning Investments for Tax Advantages
(1) Reducing the amount of taxable income
(2) Reducing the tax rate
(3) Controlling the time when the tax must be paid
(4) Claiming any available tax credit
Tax-Favored Investments:
Capital gains and qualified dividends are taxed at lower rates.
Tax Avoidance:
Tax avoidance is the legal planning of transactions to take full advantage of the tax laws. Following techniques may result in a lower tax bill without breaking the law.
1. Shifting income from a high-bracket tax payer to a low-bracket tax payer (such as child)
Example: Shifting investment assets to minor children. Owners of small business can hire their children. Make more children part of owners so that the net profits are shared among larger group.
2. Structuring an investment so that the payments are classified as capital gain. Also tax payers who receive investment income can deduct investment interest expense as itemized deduction.
3. Choosing the optimal form of organization: If the business income is less than $75,000 and is not a personal service, it may results in tax saving. Otherwise pass through entities offer more tax benefits.
Timing of Income and deductions: Taxes can be minimized in the current year by postponing the receipt of income so that more of it will be taxed next year, and by accelerating deductions into the current year.
Postponing income, accelerating deductions:
(a) Delay collections (b) Delay dividends by the corporation (c) Delay capital gain – sell appreciated value assets after 1st of the year. (d) Accelerated payments – rent,interest,insurance,taxes etc (e) Accelerated large purchase (f) Accelerated depreciation – expense the cost of the item
Accelerated income, postponing deduction: If the current years tax bracket is expected to be lower than next year’s maximize the amount of income that will be taxed in the present tax year.
Tax credits:
(1) First time home buyer credit: 10% of the cost. Maximum credit is $ 8,000. Need to buy the house before Nov 30, 2009. Certain restrictions apply.
(2) Retirement credit saving for lower income tax payers.50% credit on the retirement contribution. Phased out at $53,000.Cannot exceed the tax liability. Maximum credit is $ 2,000.Contibution reduces the taxable income and the credit reduces the tax liability.
(3) Solar heating credit: 30% of the expense. Maximum credit is $ 2,000.
(4) Buying energy efficient unit: Cost of the unit. Maximum credit is $ 500
(5) Buying hybrid car.
(6) Education tax credit:
(a) Hope credit: First two years of higher education tuition expense. Maximum $1,800 per student.
(b) Lifetime credit: All years of post secondary education expense (20%) Maximum $ 2,000 per student.
Planning Tip:
Watch the changes in tax laws that affect tax brackets. The tax rates are scheduled to increase in 2011, but shifting political winds make even the new future of the rates difficult to predict at this time.
K Bala Subramaniam
Certified Public account 9864 W Sample Road, Coral Springs, FL 33065
Tel: 954 345 8656 Cell: 954 345 8656
E-mail: balacpa@hotmail.com
