Free Tax Saving Strategies Help (Part Two)

Even this cat disapproves of this tax organizing technique!

Last month we posted Part One of a two part blog: great strategies on how to save on your 2011 taxes this year. Click here to visit the previous blog. Here are some more great tips!:

• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholdings of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2011 if doing so won't create an alternative minimum tax (AMT) problem.
• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions.
• Accelerate big ticket purchases into 2011 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won't be available after 2011.
• You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions as these deductions are allowed only after exceeding a percentage of adjusted gross income.
• If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2012.
• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses.
• If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.

Remember, make sure you are working with a pro who can help you navigate all the complex tax strategies mentioned here.  Have a dialogue!

Asset Location, Location, Location

Asset location is deciding what assets should go in which accounts.  Most investors have accounts that receive different tax treatment such as the following:

• Traditional tax-deferred account such as IRA , 401k, 403b, 457.  Contributions may be tax deductible and the growth and income are not taxed until the money is withdrawn.  Withdrawals then taxed as ordinary income ranging from 10-33%.
• Roth IRA or Roth 401k.  Contributions are not tax deductible but withdrawals are tax free
• Taxable non-retirement account.  The taxation of these types of accounts depends on the investments in the account.  Short term capital gains and interest from bonds and CDs are taxed as ordinary income, but qualified dividends and long-term capital gains are taxed at lower rates between 0-15%.

So..what types of investment should go in these different types of accounts to minimize taxes and create greater wealth?

• Traditional tax-deferred.  Corporate bonds, treasuries, TIPS, high yield stocks and commodity funds
• Roth accounts.  Small cap stocks, REITS, high turnover and/or high yielding funds especially if they have above-average growth potential.
• Taxable non retirement accounts.  Low-or non yielding stocks you plan to own for several years, low turnover stock funds (such as Index funds and tax managed funds), municipal bonds, US government savings bonds and maybe Treasuries. 

Remember:  It's not how much you make but how much you keep that matters in creating wealth.