10 Smart Tax Planning Tips
by: Roberto Cruz
- Start your planning early. This allows you
time to take advantage of strategies that may take several months to implement.
- Make your contributions to an IRA or Keogh plan early in
the year. The combination of making contributions early in the year and compounding will
make your money grow faster than if you wait until the last minute.
- Contribute the maximum to your 401(k) plan early in the
year. If you wait too long, you may not be able to contribute the full amount because of
limitations.
- If you roll over a pension distribution to an IRA
account, be sure you do it in a timely fashion. Caution: there is a 20 percent withholding
tax on lump-sum distributions.
- If you plan to work after your normal retirement date,
consider how it will affect your social security benefits. Also, consider whether you
would be better off applying for your benefits by age 62 or waiting until you are 65.
- If you have publicly traded stock that would generate a
long-term capital gain if sold, consider using it to make your charitable contributions.
(Your contribution deduction will be based on the fair market value of the stock and you
won't have to pay tax on the gain.)
- Charitable contributions are subject to certain tax
limitations. Some of your contributions to charities may not be deductible until a later
year if you exceed the prescribed limits. Furthermore, if you do not meet the
substantiation requirements, the contribution won't be deductible at all.
- Replace personal debt with mortgage debt to the extent
possible. Interest expense on mortgage loans is – subject to some limitations –
deductible; personal or consumer interest is not.
- Consider the after-tax yield of an investment when
comparing the returns on different investments.
- Consider giving gifts to your children. You
may be able to shift income to them since children are usually in lower tax brackets and
so pay less in taxes. However, if your children are under age 14, their income above
certain levels will be subject to the special "kiddies tax" rates.
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