Taxes are up. What Can You Do?

Tax rates are up. Itemized deductions and personal exemptions are being phased out. Long-term capital gains and ordinary dividends maximum tax rates are up 5%. What action can you take to reduce the potential tax bite? Here are five ideas. 1 Take full advantage of capital gains tax law. Remember losses on investments can be used to offset any investment gains. The best-case scenario for tax savings is to offset losses with short-term capital gains that could be taxed as high as 39.6%. In addition, you may take up to $3,000 in excess losses against your ordinary income. A dozen tax planning triggers 1 Maximize Tax-deferred Retirement Savings. Numerous retirement plans allow you to defer paying income taxes until funds are withdrawn. Primary examples are 401(k)s, Individual Retirement Accounts (IRAs), and 403(b)s. The pre-tax money you contribute reduces your taxable income this year. Funds are not taxed until you withdraw the contributions, usually during your lower income retirement years. 1 Consider Utilizing Home Equity. Interest on most debt, except home mortgage interest, is no longer tax deductible. But since interest secured by your primary home is deductible, you can often leverage the equity in your home via a home equity loan and deduct the interest expense. This can effectively move non-deductible interest to deductible interest. Some caution should be taken here as non-payment could put your house in jeopardy. Limits apply. 3 Shift income and expense. Remember for most of us, taxes use the cash versus accrual method of reporting. That means your income and deductible expense is based upon when you receive the funds or when you pay them. So pre-paying an obligation due the following month can move that expense into the current tax year. Delaying receipt of a bonus from December to January will lower your income in the current year. 4 Take advantage of tax credits. The bad news? There are thousands of pages in our current tax code. The good news? Included in those thousands of pages are numerous tax credits that can reduce your tax obligation. From Child Credits to Foreign Tax Credits, the options are vast. Understanding them all is almost impossible, but a quick planning session could help identify some tax savings opportunities for you.