Tax Planning Tips for 2000 and Beyond

by Stephen Kass on July 10, 2012

It’s important to keep in mind simple tax strategies when preparing for tax season.
Many of these strategies, however, can be implemented at any time during the year.

1. Contribute to an IRA – and do it early in the year.
If a taxpayer contributes $2,000 annually to an IRA at the beginning of the year, the
account will be worth $540,585 (assuming a 12% return) at the end of 30 years.
However, if the taxpayer makes the same contribution at the end of the year, the IRA
would be worth only $482,665 in 30 years.

2. Pay IRA fees from separate funds.
Having custodial fees deducted from an IRA each year significantly reduces the
account’s long-term value. A $50 fee deducted from a taxpayer’s IRA at the beginning
of each year for 30 years will reduce the account’s value by 13,515 (assuming a 12%
return). Most banks and brokerage firms permit customers to pay the custodial fee
separately rather than have it deducted from the account. Fees paid from separate funds
are also deductive as a miscellaneous itemized deduction.

3. Establish a Roth IRA.
Although contributions to a Roth IRA are not tax deductible, withdrawals have this
advantage. They are not included in a taxpayer’s income if received when the account
has been open for at least five years and the taxpayer is at least 59 ½ years old.

4. Convert an existing IRA to a Roth IRA.
An existing IRA can be converted to a Roth IRA if the taxpayer’s adjusted gross income
does not exceed $100,000. In the year of conversion, the taxpayer must include the entire
IRA balance in income if contributions were deducted when they were made. If the
contributions were not deducted, only the accumulated earnings are included in income.

5. Help a child establish an IRA.
Since children (and some young adults) themselves often cannot afford to establish an
IRA themselves, a gift of money from a parent or grandparent to be used for an IRA
contribution will allow a child to build a substantial nest egg. If a taxpayer contributes
$2,000 to an IRA beginning at age 19 (assuming he or she has sufficient earned income)
and continues contributing for seven more years, that $16,000 investment will be worth
$2,043,715 when the taxpayer reaches age 65 (assuming a 12% rate of return). However,
if the taxpayer does not begin contributing $2,000 to an IRA until age 27 – and continues
for 38 more years – the $78,000 investment will be worth only $1,368,020 at age 65.
Getting a head start on saving for retirement, therefore, significantly increases retirement
assets – with a considerably smaller investment.

6. Give appreciated stock to charity.
The taxpayers charitable contributions deduction will be the stock’s fair market value.
The increase in value is not included in income – thus avoiding capital tax gains.

7. Consider asking for additional benefits instead of a raise.
Employee expenses paid by an employer are a working-condition fringe benefit and are
deductible by the taxpayer’s employer. They are not, however, included in the taxpayer’s
income. If the employee pays for the expenses, they are treated as a miscellaneous
itemized deduction, subject to a 2% floor, and probably will not provide a tax benefit.

8. Don’t overwithhold.
This year, the average tax refund was $1,342. Why give the government an interest-free
loan? Adjust withholding to properly reflect anticipated deductions and exemptions.

9. Remember to adjust the basis of mutual fund shares for reported income.
The cost of mutual funds increases by the amount of annual income distributed that the
taxpayer reinvests in the fund. Failure to make the necessary adjustments means the
income will be reported twice: once when it is received and again when shares are sold.
Keeping records up to date is essential since shares may be sold many years later.

10. Take full advantage of education tax incentives.
The education loan interest deduction, Hope Scholarship credit, Lifetime Learning
Credit, education IRA and qualified state tuition programs can significantly reduce the
cost of higher education.

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