The Executive’s Guide: 11 Ways to Minimize Your Tax Exposure


In 2008, a government contractor in Iraq was promised he wouldn't have to pay federal income tax on his salary. The IRS, never one to honor illegal promises, made Glen Wiggy pay $30,000 over two years to cover the taxes.

You see, the truth is that the tax code is hopelessly complex. Not only that, it is constantly being amended and updated. More than 500 changes were made to the tax code last year alone. Don't trust anybody but a qualified professional to keep you informed on how to best use the tax code to your advantage. Start by familiarizing yourself with these:

1. The Gift Tax Exemption. Give a gift to reduce your estate. This won't pay off in tax savings until later, but it's a benefit that adds up. The gift tax exemption reduces your estate thereby reducing or eliminating federal estate taxes. You may give $15,000 annually to each person you wish; the gift can be in the form of stocks, cash, estate portions, or bonds. You and your spouse may both give gifts of $15,000/recipient to reduce your estate by a total of $30,000 per year.

Keep a record of your gifts. If a gift exceeds $15,000, then gift taxes may apply. Paying for the education of a child through a 529 plan acts as a gift as those contributions are considered to have been removed from your estate.

2. Tax-advantaged Savings Plan Contribution.

Tax-advantaged savings plans such as 401(k)s and IRAs are tax-deferred or fully tax-exempted. Contribute to the savings plan before December 31st or before April 15th for some plans.

Contributions to a 401(k) made by December 31st are deducted from taxable income for the year the contribution is made. Your asset grows tax-deferred. For persons under the age of 50, the 401(k) contribution cap is $18,500 per year; the limit is $24,500 for those more than 50 years old. If you miss the 401(k) deadline, then contribute to an IRA by April 15th to reduce your taxable income for the previous year. IRA limits are $5,500 for those aged 50 and below while those above 50 have a limit of $6,500.

3. Investment Loss Harvesting.

Consider this capital gains tax savings when the stock market has a bull run. Capital gains tax has a way of eating up your gains without sharing investment losses. Balance gains by selling losing investments that you no longer wish to hold in your portfolio. Write off capital gains for the year using the capital losses from the disposed investments. A substantial loss counters your gains, effectively reducing your capital gains tax. Don't purchase the same investment, or a substantially identical investment, within 30 days of the sale to take advantage of the loss.

4. Charitable Contributions.

Take advantage of a classic--the charitable donation. Donate used clothes and household items to any charitable organization for a tax deduction of their fair market value. Have a reasonable valuation of the items you donate to avoid undue IRS scrutiny. If you make a cash donation of more than $250, get a receipt with details of the donation and a statement of any benefits or services received in exchange. A used car worth more than $500 is valued at the price the charity receives for its sale.

5. Roth IRA Conversion.

Consult your estate planning attorney to determine if converting to a Roth IRA makes sense for you. Roth IRA withdrawals are not taxable but your current retirement plan is. Your estate planning attorney will guide you based on your current tax rate and anticipated investment growth. Taxes are paid on your savings at the time of conversion. A Roth account must be open a minimum of five years to enjoy tax-free withdrawals. If you are over 59 1/2 years old at the time of withdrawal, then you have penalty-free withdrawals.

6. Donor-Advised Fund.

A donor-advised fund is a charitable option that reduces your tax burden and your estate. You place securities in a donor-advised fund and the administrator sells the securities, depositing the proceeds in your account. You do not pay taxes on the sale. The proceeds can be donated at a later time.

7. Tax-Exempt Municipal Bonds.

This is an option those in higher tax brackets can't afford to ignore. Consider a municipal bond yielding 5% or a corporate bond at 7%. A $100,000 investment in a municipal bond returns $5,000, the corporate bond returns $7,000 less $2,590 at a federal tax rate of 37% for a net of $4,410. The tax-exempt municipal bond is the clear winner. Consider your tax burden with every investment for an accurate assessment of your net.

8. Gift of Securities.

Individuals in high tax brackets usually pay a 23.8% tax on profits from the sale of securities. Adults in the 10 to 15% tax bracket pay 0% tax on profits from securities held for more than a year. If you are making a gift to a relative in the lower tax bracket, then consider a gift of securities. You avoid paying tax on the profit, reduce your estate, and provide the recipient a gift without a tax burden.

9. Tax Refund Reduction.

If you commonly receive a tax refund after filing, then manage your allowances instead of giving the IRS a tax-free loan. Complete a revised W-4 form. Claim more allowances to reduce the amount of tax withheld.

10. Charitable Gift Deferral.

Just as you use your estate plan to manage your finances now to meet your later goals, manage your revenue and expenses from year to year to manage your tax burden. For example, if you expect your taxable income to rise next year, then defer charitable gifts to next year to reduce your tax liability.

11. Deductible Payments.

If you expect your taxable income to fall next year, then make tax deductible payments for next year this year. For example, pay advance interest on your mortgage to reduce your tax burden for this year.

Consult your estate planning attorney to manage short-term and long-term finances for tax and estate benefits.

If you would like to talk about how this could be applied to you, then please give me a call at (858) 792-3444.

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