After you take maximum advantage of 401(k) accounts and other employer-sponsored plans, if you are age 49 and below should you put as much as $3,000 per year in tax-deferred, traditional IRAs in (04), $4000 per year in (05-07), and $5000 per year in (08) or in tax-exempt Roth IRAs? The limits if you are age 50 and above are $3,500 (04), $4,500 (05), $5000 (06-07), and $6000 (08). And should you convert any traditional IRA accounts into Roth accounts?
When should you begin withdrawing money from traditional IRAs - before retirement, at retirement (when your tax bracket likely drops), or not until the mandatory disbursement age of 70 1/2?
When is it smart to use tax-free municipal-bonds?
Is it better to sell a short-term investment and nail down gains even though you will have to pay capital-gains tax at your marginal income-tax rate, or to stand pat (and risk an investment decline) until your gains become long-term?
Should you give appreciated fund shares, stocks, or other income-producing assets to lower-bracket heirs now, before you die? If you do, you'll be able to shift future investment income from you to them and probably reduce your estate taxes - good things, especially if your tax bracket now is high. But if you hold your property until you die, your heirs will get to "step up" its cost basis to its value at your death, meaning their capital gains taxes could someday be much lower.
Do you expect to be in a lower (or much higher) tax bracket next year? You must know this to sensibly decide whether to take or defer income and deductions this year (in cases where you have a choice).
Preserve Tax Breaks
Sell on installment - If you have a taxable profit on the sale of real estate, business property or personal effects, the tax law allows you to be paid in installments that may stretch out over years. The main advantage is that you don't have to report the gain on your tax return until you receive the money, so the sale won't push you into a higher tax bracket or boost your AGI to a level where you lose tax benefits. The disadvantage is that you don't get all of the money right away, and thus can't spend or reinvest it immediately.
Every dollar you put in your 401(k) reduces your AGI by a dollar.
Give income-producing assets to your children who are age 14 or older. When you give interest- or dividend-paying assets to your kids who are at least 14, the income shows up on their returns, not yours.
Give stock to your children who are age 14 or older. If you're ready to sell appreciated stock, give it to children who are at least age 14. They can then sell the stock and report the profit on their return. And you avoid including the gain in your AGI. As an added plus, children will pay tax at their rate. Click here for a good article on capital gains tax.
How to save on taxes
Wages - Take full advantage of any employer pretax plans, such as 401(k) retirement and flexible-spending accounts.
Taxable Interest - Tax considerations shouldn't drive investment decisions, but if you have significant interest income, you may want to consider tax-exempt investments. (Put in a tax vs. tax-exempt calculator here)
Dividends and Capital Gains - Consider sheltering dividend-paying assets in tax-deferred retirement plans and using taxable accounts for stock market investments.
IRA Deduction - If possible, be sure to use your IRA up to the contribution limit.
Student-Loan Interest
Medical Savings Accounts and Self-Employed Health-Insurance Deductions
Keogh Contributions - All contributions are fully tax-deductible and accumulate tax-free.
Itemized Deductions or Standard Deduction - find ways to increase your itemized deductions (points and a year's worth of mortgage interest should give you plenty to itemize: switch credit-card debt to home-equity debt; medical expenses; miscellaneous deductions; charitable-contributions.
Credits - Credits are better than deductions because they offer a dollar-for-dollar reduction in your tax bill. (child tax credit; education credits)
Take the time and fill a new Form W-4 if you receive a large refund. Why give the IRS a tax-free loan.
You may need to double up some expenses in the same year to exceed some thresholds.
Use losses to offset gains - if you have a stock and it's a loser and you don't think it's going to recover, sell it.
Make sure your withholding is in line. If you had to pay a lot of taxes this year or a penalty for underpayment, increase your withholding. But if you're getting a big refund, don't think that's so great. You've been making an interest-free loan to the government all year. So you should look at lowering your withholding.
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