Seven simple tax-saving tips
I have never met anyone who wanted to pay more income taxes than they legitimately owe. The super-rich have accountants and lawyers scrutinizing every aspect of their income and expenses to assure they take advantage of every tax loophole and pay the absolute minimum in taxes.
Since most of the rest of us cannot afford personal tax lawyers, here are seven simple ways that you may be able to lower your tax bill for 2011.
1) Spousal IRAs: If only one spouse has a company retirement plan, the other spouse may contribute up to $5,000 ($6,000 if age 50 or over) to his own IRA, even if he has no earned income in 2011. The spousal IRA contribution is fully tax deductible and must be made before April 15, 2012. Your combined incomes must be less than $169,000 to receive the full spousal IRA deduction.
2) Investment Tax harvesting: Taxable investments with short or long term losses can be sold by year end to provide a tax deduction of up to $3,000 in 2011. Be careful not to repurchase the same security in less than 30 days as this creates a "wash sale," eliminating the loss deduction. However, buying a similar fund is allowed. Let's assume that you have the iShares MSCI Emerging Markets ETF (EEM). You may sell the EEM ETF and immediately buy the similar Vanguard MSCI Emerging Markets ETF (VWO) without creating a wash sale.
3) Mutual Fund sales: If you are considering selling a mutual fund, but are waiting until 2012 to avoid paying capital gains taxes in 2011, you may end up paying capital gains taxes in both years. Most mutual funds have year-end distributions of short term and long term capital gains in December. By selling now, these year-end distributions can be avoided.
4) Charitable contributions: If year-end charitable contributions are planned and you have stocks with long term capital gains, consider donating shares of appreciated stocks. No capital gains taxes are ever paid on the donated appreciated stock and the full charitable deduction is provided for the value of the stock. The simplest method of accomplishing this is by setting up a donor advised fund through your custodian (brokerage firm).
5) State Sales Tax Deduction: If you itemize deductions and are retired or received limited income in 2011, utilizing the state sales tax deduction instead of state income taxes might prove beneficial. The benefits of using state sales taxes will only apply if sales receipts for higher priced purchases (each of which was taxed at over 8% in Colorado) have been saved. If you did not save your receipts in 2011, consider saving receipts in 2012.
6) Colorado 529 Plan: If you are a Colorado resident with a child or grandchild in college, consider putting next year's funds for tuition, room and board and other required expenses into College Invest, the Colorado 529 plan. Any contributions made to College Invest in 2011 are dollar for dollar deductible against 2011 Colorado income taxes. Assume that college expenses for 2012 will be $30,000. By depositing that amount into College Invest during 2011, the 2011 Colorado income tax bill will be almost $1,400 less. With this short term approach, keep 529 funds in the money market investment option until they are used to pay for a child's or grandchild's college expenses.
7) Roth IRA contributions: Even if you are covered by a company retirement plan, contributions of up to $5,000 ($6,000 if age 50 or over) to a Roth IRA are allowed, as long as adjusted gross income is below $169K for joint filers or $107K for single filers. While a Roth IRA contribution does not lower 2011 income taxes, Roth income grows tax free throughout your lifetime and potentially the lifetime of your beneficiary. If funds are ever required from the Roth IRA, the funds contributed can be withdrawn with no taxes or penalties.
Hopefully, one or more of these tax savings ideas will be helpful in reducing 2011 taxes. If these tips provide some unexpected savings, I hope that you will save and invest these funds to help you prepare for a financially abundant future.
Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor, providing fee-only wealth management services. He is the author of "Financial Abundance Guide," available free at www.finabguide.com . He can be reached by email at firstname.lastname@example.org or at 303-554-0309.