Pay Less, Keep More: Tax Tips & Tricks

Taxpayers are entering the homestretch as the IRS deadline fast approaches.


Over the last 20 years, we have found most individuals understand the need to have their taxes prepared, yet unaware how planning taxes can help reduce the amount owed to Uncle Sam and keep more in their pocket.


There are methods and strategies available providing the potential to lower tax payments based on your situation. We utilize tax planning as part of our clients process to help increase annual income, lower tax on distributions, and leave a larger legacy for loved ones.


The following provides tips and examples of strategies designed to help maximize your planning and reduce unnecessary payments to Uncle Sam:


1. STRUCTURE INCOME CORRECTLY – When you retire, the sources of your annual income will have a large impact on your tax commitment as distributions can be taxed in different ways. As an example, IRA distributions are fully taxed as income, but payments from Social Security can offer tax benefits. Pension and annuity distributions can vary in tax treatment at times and utilizing non-taxable funds for a portion of income could provide the potential to reduce tax liability in other areas.


2. UNDERSTAND THE IMPACT WHEN LEAVING TO LOVED ONES– Part of our planning process involves a review of a family’s beneficiary forms on accounts like IRA’s, annuities. and life insurance. Many of our clients have an interest in leaving a portion of their estate to a non-profit organization like church a church or charity.


In these situations, when these families first walked in our office, it was common to see beneficiaries structured as follows:


a. IRA’s, annuities, and 401k’s are left to children at death


b. Life Insurance is designated to pay out to the church or charity


Through the planning process, we are able to explain that non-profit organizations are set up to received taxable accounts like IRA without having to pay tax and life insurance passes to children income tax free.


Based on this, a better plan might be to switch the existing beneficiaries which would:


a. Pass IRA and annuity accounts to the non-profit without tax liability


b. Provide the children with tax-free funds from the life insurance (assuming the total estate is under the $5.2 million dollar exemption amount)


3. MAXIMIZE CONTRIBUTIONS -Taxpayers looking for additional tax deductions should first ensure they have maxed out their deductible contributions into available retirement programs (IRA’s and 401k’s). A few tips to help with this:


a. Individuals have until April 15th to make a contribution for previous year


b. Non-working spouses can contribute up to $5,500 ($6,500 if over 50) as long as they file jointly with their working spouse.


4. REQUIRED MINIMUM DISTRIBUTIONS – Once you reach age 70 1/2, the IRA requires you to take a minimum distribution from your IRA’s and 401k’s. Failure to do so will result in a 50% penalty of the amount due.


Following are 2 strategies to consider when taking RMD’s


a. Pay tax on other income – Use this distribution to pay the tax on other taxable income taken during the year. How to do this. Wait until December, determine how much tax is due from other income and then hold back a large chunk from this distribution to pay the tax.


b. Help others, avoid taxes – If you have charitable intent, the IRS allows you to transfer your RMD directly to a non-profit organization without incurring taxes, while still satisfying your distribution requirement.


c. Delay RMD’s  – If you are still working past the age of 70 1/2 you might be able to delay the required distributions from your 401(k) (not IRA’s) until you retire. To qualify for this delay you cannot own more than 5% of the company and your 401k program must allow for this provision.


5. CONSIDER A ROTH IRA – Roth IRA’s can be an important tool when it comes to tax planning. As a reminder, Roth IRA’s take in money already taxed in exchange for allowing distributions later to be income tax free.


Converting funds from a taxable IRA account into a Roth can offer many advantages such as lower future RMD’s, tax free funds to lover ones, lower income tax, etc. The downside of this approach is the amount of tax due at the time of conversion.


One strategy to consider is converting a portion every year for a number of years to reduce the potential tax bite or covert more in years with low tax liability.


6. REMOVE COMPANY STOCK FROM YOUR 401k – Funds taken from your 401k are taxed fully as income. Often, when someone retires they have a large portion of their company 401k invested in their company’s stock.


The IRA provides a strategy to remove this stock from the 401k and re-allocate into an outside brokerage account which can provide tax benefits in the following ways:


a. Income tax is only due on the actual cost basis (purchase price) of the company stock, not the current value.


b. Assuming you hold the stock for 12 months after pulling from the 401k, you will then only pay long-term capital gains tax on the profit of the stock which is currently capped at 15%.


7. KNOW OPTIONS ON EARLY WITHDRAWALS – Taking dsitributions from an IRA before the qualifying age of 59 1/2 will incur a 10% penalty on the full amount. However, the rules on 401k’s are different and allow penalty free withdrawals starting at age 55.


These are just a few of the many options to consider to help keep more of your hard earned money from the tax man.


Feel free to contact us with any questions or if you would like to set up a time to have your taxes reviewed for free.


Disclaimer: This newsletter is a publication dedicated to the education of individual investors. This newsletter is an information service only. Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.


Advisory services offered through Enhance Wealth, a member of Advisory Services Network, LLC, 6600 Peachtree Dunwoody Road, Embassy Row 600, Suite 575, Atlanta, GA 30328. 770-352-0449 Insurance products and services offered through Enhanced Capital, LLC. Advisory Services Network, LLC and Enhanced Capital, LLC are not affiliated.


The opinions expressed herein are solely those of the author and do not reflect the opinions of Advisory Services Network, LLC or any of its other advisory representatives.