Ever heard of Tax Freedom Day. On April 17th, 2006 the average South Carolinian has worked enough to pay for just their federal, state and local tax burdens for the year of 2006. The rest of the year's earnings are for you to spend on what you need and want to.
This brings us to the walls of our solid financial plan. The first wall is tax planning. As always in anything discussing tax strategy, I need to tell you always to seek guidance from your own tax professional who knows your situation best.
Tax planning involves seeking strategies to reduce your tax burden or at least be tax efficient with your investments. Seeking ways to reduce or defer or possibly eliminate taxes is what tax planning is about.
The simplest tax strategy is funding long term investments like college savings and retirement in tax deferred vehicles. Using 529 plans to save for college give tax free growth and some additional tax savings. Fully contributing to 401K’s, SEP-IRA’s, IRA’s and other qualified retirement plans can give you a tax deduction along with tax deferred growth. Also by using annuities for long term retirement investments you can get even more tax deferred growth on monies you can’t put into your qualified retirement plan.
Another simple strategy is giving away highly appreciated assets. Instead of tithing cash to church give the same value of a highly profitable stock. In doing so you give away the tax consequences you would owe, your church gets the same tithe, and you have cash to start a new investment at a more advantaged cost basis.
At year end match losing stock positions with profitable sales from the year. Use your losses to decrease your profits on a taxable basis. If you have a down stock that is a good investment sell it and buy it back 31 days later at a new lower cost basis.
If you have passive income or passive losses you should check in to the Pig-Pal strategy. A Pig (passive income generator) is matched with a Pal (passive activity loss) so they offset each other. This is a great strategy to use with real estate investments.
Another good real estate strategy is taking advantage of IRC 1031 tax free exchanges. This part of the tax code allows one to swap a piece of income generating or business property for another of higher value without paying capital gains taxes today and carrying over your cost basis of the first property to the new one. With the securitization of real estate this area has some really neat sub-strategies.
These are but a few of the tax savings strategies out there to help you increase your net worth. As mentioned earlier always consult with your tax advisor on any of these strategies
Thanks for the strategies. They seem to be very accurate and should be very useful!
Posted by: Private Commercial Lender | April 04, 2008 at 02:21 PM