Mid Year Tax Tips

Posted on June 28th, 2011 in Newsletter Articles, Taxes by wayne

Even though 2010 taxes were only finalized in April, now is the time to begin planning for reducing your 2011 taxes.  Regardless of what the government decides about future tax rates, it will always be incumbent upon the US taxpayer to pay the minimum taxes owed.

The wealthy have lawyers and accountants that look for legal ways to avoid paying higher taxes.  The rest of us must use all of the resources available to only pay our fair share.  Here are three ways to reduce your tax bill on April 15, 2012.

Colorado 529 Plan Contribution = Immediate tax deduction – If you are a Colorado resident, every dollar contributed to a Colorado 529 plan is Colorado tax deductible.  Thus, if you contribute $40,000 to a Colorado 529 Plan in 2011, you can deduct $40,000 from your Colorado taxable income, whether you are a parent, a grandparent or even an uncle.  Let’ assume that you are paying for your daughter (or paying for your granddaughter) to go to Harvard, costing approximately $48K per year.  You can put the $48K into a Colorado 529 plan money market fund and withdraw it this year, as the yearly payments to Harvard come due.  There is no risk of loss from the investment and the $48K is fully deductible on your Colorado income taxes.  I wish I had been aware of this approach when my two kids went to college.

Save Those receipts – If you itemize tax deductions for federal income tax purpose, you may choose between deducting the state and local income taxes paid or deducting the amount of sales taxes paid in 2011.  Almost everyone in Colorado, regardless of their income, deducts their state and local income taxes.  However, if you are retired, having a low income year or buying an expensive new car, it may be more advantageous to deduct state and local sales taxes instead of state income taxes.

Assume that you buy $80,000 in fully taxable items in Colorado during 2011.  With Colorado’s 8.5% sales tax you pay $6,800 in Colorado sales taxes.  If your federal taxable income is $100,000, at Colorado’s 4.64% income tax rate, your Colorado income tax deduction is $4,640.  By saving your sales tax receipts, you can deduct an additional $2,160 from your federal income taxes.

The IRS sales tax tables significantly understate actual sales tax payments. For the sales tax alternative to succeed, you must save your sales tax receipts.  However, a little effort may save hundreds of dollars in federal income taxes.

Roth Conversions NOW – Anyone, regardless of income, may now convert IRA funds to a Roth IRA.  While immediate taxes are due on the amount converted, the ability of these funds to grow tax free for both the rest of your life and the rest of your beneficiary’s life makes these funds a valuable asset.

You may be hesitant to convert funds before the year-end deadline, since, if the market crashes after the funds are converted, you would pay taxes on the higher (conversion) value and have significantly less funds in the tax free Roth account.  Thanks to “recharicterization” rules, this is not be a concern.

When you convert IRA funds to a Roth IRA at anytime during 2011, you have until October 15, 2012 to “recharacterize” these funds.  This allows you to move the funds back into the original IRA and remove the tax consequences associated with the 2011 Roth conversion.  You are still able to do a Roth conversion in 2012, paying lower taxes on the same net amount converted.

These are only three of the tax saving opportunities provided by our convoluted tax code.  If there are any questions about how to safely and successfully execute these tax saving strategies, do not hesitate to give a call.

Financial Independence For a Lifetime

Posted on June 28th, 2011 in Financial Abundance, Newsletter Articles by wayne

On July 4 1776, our forefathers declared that we should be an Independent Nation.  Today, many of us would like to declare our financial independence.  As financial conditions continue to change throughout the world, it has become more challenging to attain this goal.  While there are no guaranteed methods to become financially independent, here are seven steps to help increase the probability of reaching this goal.

1) During prime earning years, the single most important step that can be taken toward future financial independence is to save at least 10% of after tax earnings.  If your company 401(k) plan matches your contributions, put at least the amount that is matched into your 401(k) plan each year.  This assures an immediate doubling of the amount saved.  Any additional available savings should be put into an “emergency fund.”   An emergency fund is an account that can cover at least six months of current expenses.  This fund is only to be used for true emergencies such a job loss or a short term disability.  Emergency fund investments should be stable in value and highly liquid.

2) When the emergency fund is in place, additional savings, up to the maximum amounts allowed by law, should be put into a tax deferred account such as a 401(k), 403(b), SEP IRA, etc..  This approach provides for a reduction in current taxes and allows the investments in these accounts to grow tax free until they are withdrawn.

3) When buying a house, use the shortest mortgage payoff period that your cash flow will allow.  A 15 year mortgage saves thousands of dollars in interest and provides for a much faster pay-down of your principal.  If you move or decide to upgrade your home, reinvest ALL of the equity that you receive from selling your previous house into the new house.  With this approach, your house will likely be mortgage free by retirement.   Remember, a house is NOT a piggy bank (at least at this point).

4) In determining when to retire, financial independence requires that income be maintained for as long as possible.  If your work is enjoyable, keep doing it past normal retirement age, while taking more vacations and working less hours.  If you dislike your work, explore options for creating a “retirement career.”  If you enjoy making furniture, make high quality furniture and sell it on ebay.  You will be doing what you love, receiving income and working as much (or as little) as you wish.

5) Upon reaching the age to begin receiving Social Security, carefully examine when you should start receiving these benefits.  Just because benefits are available does not mean that they should be taken.   A financial advisor who understands the vagaries of Social Security can help analyze your situation to decide the best time to begin taking Social Security benefits.

6) If the previous steps are followed, there should be no home mortgage remaining at retirement age.  At this point in life, many people find that they prefer to live in a smaller house.  Buying a less expensive house, frees up funds that can help insure financial independence throughout your retirement years.

7) In later life, if funds from savings, retirement accounts and Social Security are not providing adequate income for financial independence, it is time for the house to become a “piggy bank.” Your house can be sold and the funds received can be used for a retirement home or for nursing home care.  If you wish to remain in your house, a reverse mortgage will provide funds, based on the value of your home.  Reverse mortgages can be obtained through a commercial lender or even through your children.  By either selling the house or using a reverse mortgage, the home’s value can often replace the need for long term care insurance, saving thousands of dollars of annual premiums.

While there are many other methods to help insure financial independence, following these straightforward steps throughout your lifetime will dramatically increase the odds of living a lifetime of financial independence.  On July 4th, let’s celebrate both our nation’s independence and our journey toward financial independence.