Free Tax Saving Strategies Help (Part One)

Photo by soukup on Flickr.

Whether you like it or not, you have to pay taxes.  But understanding the tax code these days requires a rocket scientist to interpret.  Even Albert Einstein said “the hardest thing in the world to understand is the income tax.”  There is hope and that’s where a good tax advisor comes to the rescue.  Our firm take a very proactive approach to tax planning.  Let’s look at some ways that your taxes can be reduced for 2011:

• Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Don't forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
• If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2011.
• Sell the stock/mutual fund losses in your taxable portfolio and capture the losses.  Even if you cannot use all the losses in 2011, they can be carried over.  You can always claim at least $3,000 in losses in any one year.  That’s a savings of $1000 in taxes for most folks.
• Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill
• Consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011. However, Roth IRAs are tax free forever. 
• If you converted assets in a traditional IRA to a Roth IRA earlier this year and the assets in the Roth IRA account have declined in value and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA. 
• Consider deferring any bonuses into early 2012.
• Consider using a credit card to prepay expenses that can generate deductions for this year.

Tomorrow, I'll have more free tax saving tips to save you even more in 2011! Remember, make sure you are working with a pro who can help you navigate all the complex tax strategies mentioned here.  Have a dialogue!

10 Financial Truths that are Just Plain Wrong

Many of the financial planning concepts and strategies that have been around for many years are just not applicable to most folks. A lot of these so called “truths” developed out of the need to sell products rather than doing what is right for the client. In the next few blogs, we are going to debunk these financial “truths” and set the record straight. Much of this information comes from a real pioneer in the fee-only financial planning arena and his name is Bert Whitehead, the founder of Alliance of Cambridge Advisors, of which I fortunate to have been a member for the past 13 years. And am still actively involved. So, let’s get started


1. Risk Tolerance is an important consideration in your portfolio---WRONG

Most financial advisors, stock brokers etc…. administer a psychological test to clients to assess their psychological tolerance for risk. This is really a CYA strategy that is more about protecting the advisor or broker. The real question that needs to be probed and addressed is how much risk the client currently has in his/her life. Based on an analysis of current risk, we then determine how much risk is appropriate for the client.


We look at things like job stability, persons dependent on your income, current savings level, protection against inflation and deflation and risk needed to meet the client’s goals. I am a big fan on only taking as much risk as is needed. This is totally counterintuitive to psychological risk questionnaires. For example, let’s assume that a person answers test questions that show an enormous appetite and tolerance for risk. However, they are in an unstable job, married with 3 people dependent on him/her and have not been saving much. It doesn’t matter how the test scores came out, this person should not be taking a great deal of risk in their investments. Get the picture?


Bottom line… It is the current risks in your life/job/circumstances that are important and not some risk tolerance score based on a set of questions.


Next blog…we will look at debunking myths about inflation. Stay tuned.