Income tax rates are now known. Everyone, regardless of where their bracket tops off, can benefit from action meant to lessen taxes. Action that must be considered:
• Contribute the maximum to a 401K or similar retirement plan. This goes in before tax and thus saves taxes in the top bracket in which taxes are paid. So a tax payer gets, in effect, an interest free loan from the federal government equal to that bracket to invest for themselves in their retirement plan. Taxes will be paid later but in the meantime, those funds are invested on a tax-deferred basis. This is meaningful whether the top bracket for an individual or family is 15%, 25% or 39.6%. To do this, get a handle on income and expenses as to redirect wasted funds into productive retirement investments. Do you really need that $4.50 latte today? Pay yourself first and then enjoy the rest of your income.
• Convert income oriented securities in a personal portfolio to a growth oriented. Risk must be considered in this move. But dividend and interest income is taxed at ordinary income rates as received and in the payer’s highest bracket (on top of the pile) while capital gains rates are lower and paid later.
• Defer current income where possible until later when you may be taxed in a lower bracket.
• Utilize tax free bonds where appropriate based on tax bracket.
• When funding for a child’s or grandchild’s education, use 529 plans that allow the donor to control the investments and, if disbursed correctly and used for qualified expenses, the earnings grow tax-deferred and then are distributed tax free. Again, all savings are in the donor’s top bracket.
Estate tax rates and exclusions:
• A $5 million exemption is good and can be doubled if married. Consult with your attorney, CPA and financial advisor about estate tax reduction strategies. The law, like all such legislation in the past, will offer opportunities for planning and pitfalls for those who fail to plan.
This should not be considered specific advice for any individual. In all such actions, use a financial and tax advisor to make sure the action is right for you.