Tax Exempt vs. Tax Deferred Income

It’s tax time and everyone wants to know how to reduce their income tax liability. While it may be too late to make changes that impact 2014, you’ve got plenty of time to make changes for 2015. As you do so, keep in mind the differences between tax exempt and tax deferred income. Tax exempt income: Many tax-exempt investments are available that provide interest without taxation. Most common are municipal bonds issued for various government operations like building roads, schools, libraries, etc. These are issued free of federal tax, and may also be free of city and state taxes if the purchaser resides in the locale. Your financial planner will guide you with selecting the best tax exempt investments for your portfolio by comparing the after-tax return rate with other investments of similar risk, so you receive the best return available. Your financial planner will also advise that though the interest is tax exempt, you may be liable for capital gains tax when these bonds are sold. Tax free growth is one of the most potent investment opportunities available, but there are many rules and tactics to contemplate when considering tax exempt income, and your advisor will help you select the best choice for you. Tax-deferred income: With tax deferred income, the return on these investments is not taxed until it is withdrawn. Therefore, earnings continue to grow without the restriction of taxation, making these investments another formidable opportunity for investment growth. As these investments have a time-value advantage, your estate may not need to withdraw any earnings for quite a while, at which time you may be retired...

Alternative Minimum Tax and Capital Gains Tax

While there are a seemingly endless variety of taxes that local, state and the federal government imposes on citizens, here are two taxes that are worth a quick description because these may impact you directly. The Alternative Minimum Tax (AMT): The AMT is mostly focused on individuals, C corporations, estates and trusts with high income to ensure that these entities don’t completely escape federal-level income tax through the adroit use of deductions, credits and exclusions they may employ. This way, these entities pay income tax through the AMT’s alternative tax system. Capital Gains Tax: A capital gain occurs when a capital asset such as stocks, land, buildings or equipment is sold at a higher price than the price of its original purchase. The capital gain is the difference between the two prices. If one of your assets has a capital gain when it’s sold, you have incurred a tax liability on the appreciated value. However, since the current highest tax rate for ordinary income is presently 39.6% and the current highest tax rate for capital gains is presently 20%, or almost half, it’s to your tax-savings advantage if you can precipitate more capital gains, either by selling capital assets or earning certain dividends that are taxed at capital gains’ tax rates. The preceding text is an excerpt from “Exit Insight: Getting to ‘Sold!’” by author Joseph M. Maas, available for purchase online at Merrell Publishing or Amazon....

Planning for Income Tax Reduction

The purpose of planning a tax strategy on the income you receive is to limit the amount of federal income tax you would otherwise have to pay. There are several ways to do this so you can save your hard-earned money, such as reducing your taxable income, or perhaps deferring income to another tax year, or choosing to shift income to family members in lower tax brackets. Other strategies include investment tax planning, deduction planning, and year-end strategies that reduce your estate’s income tax so you preserve as much of your wealth as possible. Defer Your Income: By postponing income in the current tax year until a future year, you may be able to reduce your immediate tax liabilities, and also be in a lower tax bracket as well, saving taxes in two ways. An arrangement like this is possible with certain retirement plans, or you may be able to structure the sale of your business so that you receive income from the sale on a schedule. Shift Income to Family Members: Federal income tax liabilities can also be reduced by shifting income to other members of your family who are in lower tax brackets. You may own a stock that generates a lot of dividend income; when you gift the stock, the tax responsibility is shifted, assuming you don’t exceed the $13,000 ceiling on tax-free gifts. A family limited partnership might also be an appropriate way to shift income so tax liabilities can be reduced. As you realize, there are a number of factors involved when income shifting to family members, including children, in a C corporation, an...

The Purpose of Risk Management

There is a great variety of risk in our lives, and mitigating these risks is an intelligent response to achieve financial self-preservation. Personal risk When considering insurance as a means for financial protection, two main issues must be considered and resolved: Your ability to accept the financial risk inherent in insurance policy protection, and Your willingness to weather the volatility that sometimes accompanies insurance policies’ value development There are two main reasons for purchasing insurance policies: To protect your financial well-being To accumulate cash And: a combination of the two Insurance as a source of financial support for dependents Insurance can be an excellent tool for providing financial support to the surviving family members. Funds from insurance policies can be used for the typical household expenses of paying bills, maintaining mortgage payments, purchasing food, clothing and health care, and can also be applied to education, day care, legal fees, or business costs. Insurance to service debt Insurance is also an effective means for providing resources to pay off a mortgage, vehicle loans, credit card debt, and debts such as college or business loans. Death does not terminate the estate’s obligation to pay back these debts, and an insurance policy could be very useful for preserving your survivors’ finances. Insurance for personal uses Insurance policies can also be a great resource during your lifetime. Cash value life insurance policies can potentially accumulate cash you can use for any purpose through a policy loan, or policy termination if circumstances warrant. If you terminate your policy, you would pay taxes on the funds you receive, possibly at a favorable rate. Assessing your...