How To Protect Assets From Taxes"...only two things in life are inevitable, death and taxes..." Benjamin Franklin The amount that we pay in federal and state taxes (as well as the dreaded tax on social security benefits) is enough to choke a horse. Benjamin Franklin once said famously that the only two things in life that are inevitable are death and taxes. Well, we may not be able to do anything about the first of those two but we do have more control over what we pay in taxes than we often realize. Below are some ideas that may be of some help to you. Rockefeller was often quoted as saying, ". . . not paying taxes on money you are not spending is key to financial success." If you have money in a taxable money market, savings account or certificate of deposit, then you are taxed on the interest earned even if you leave the interest in the account. To avoid this tax, try a tax deferred savings account. These accounts do not cause you to pay taxes on your interest until you decide to withdraw it. Retirement AgeIf you are a "young senior" and are taking social security but still working between age 62 and 65, you need to take extra care that you aren't shooting yourself in the foot. The problem is, in this three year window you must repay social security $1 for every $2 you earn at work over approximately $11,000. It might make sense to take a part-time job if you find yourself in this position so that you don't end up having to pay back any of your social security income.Once you reach age 70 1/2 you are required to take a withdrawal from your IRA or 401(k) type accounts. In the year that you reach 70 1/2 you have a choice. You can delay your first withdrawal until the next tax year, or take it in the current tax year. If you delay, you will need to take two withdrawals the following year. This strategy may cause you to pay extra taxes by essentially 'doubling' your withdrawal in one year. Avoid this by taking your first required IRA distribution in the year you turn 70 1/2. Inheritance Tax ExemptConsider naming a charity as the beneficiary to your IRA or 401(k). If left to your heirs, these types of "tax qualified" accounts are fully taxable. If you have a desire to benefit a charity at your passing, consider naming them as beneficiary. Charities pay no taxes on these bequests while your heirs could possibly end up paying up to 70% in taxes leaving only 30% for them to enjoy. Instead, leave stock accounts or mutual funds to family. Under current tax law, these assets would potentially not be taxed at all to your heirs due to a "stepped up basis" at death.Be aware that tax-exempt bonds really are not tax exempt once you begin receiving social security benefits. In fact, tax exempt interest is included in what's known as "provisional income". Provisional income is all income from interest, both taxable and tax-exempt, dividends, pensions, wages and capital gains. If your provisional income is over $25,000 and you are single, 50% of your social security income will be subject to income tax. If it exceeds $34,000, 85% of your social security will be included as income and taxed. (The numbers are $32,000 and $44,000 respectively for married filing jointly.) To avoid this, you might try a tax-deferred account to reduce your provisional income - especially if you have interest income that you are not spending. Phantom IncomeWatch out for unexpected phantom income from mutual funds. What's phantom income? Money that you are taxed on that you didn't physically receive. Mutual funds are required by tax law to pass on 95% of their taxable gains to shareholders every year, even if the shareholder never took a dime out of the fund.Notice: Learn more about our team and why you may want to consider contacting us. We are a Maryland-based business for local residents but we can also direct you to the appropriate agent in your area regarding the same strategies that we offer to improve your safe money management plan. Your future and your family will thank you for it! |
Randall Roberts |
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