- Category: Individual Taxes
- Written by Jonah Sparks
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Due to changes in tax laws, strategies for lowering individual income taxes are harder to come by. But they do exist.
Accelerate Capital Losses and Defer Capital Gains
If you have investments on which you have an accumulated loss you should consider selling prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you plan to sell an investment on which you have an accumulated gain, it may be advantageous to wait until after the end of the year to defer payment of the taxes (subject to estimated tax requirements). For most capital assets held more than twelve months the maximum tax is currently 15%. Before you make a decision, consider the investment potential of the asset to determine whether to hold or sell, thereby maximizing the economic gain or minimizing the economic loss.
Defer Bonuses or Other Earned Income
If you expect to earn a bonus at year-end, investigate the possible of deferring receipt of those funds until January. This strategy can defer the payment of taxes (other than the portion withheld) for another year. If you're self-employed, postpone the billing of clients or customers until after the start of the new year. This presents another opportunity to defer some of the tax, subject to estimated tax requirements. It’s possible that you may even save taxes if you happen to be in a lower tax bracket the following year. Be advised that the amount subject to social security or self-employment tax may also change.
Monitor Trading Activity in Your Portfolio
When stock sells at a gain you accumulate realized taxable gains even if you don't withdraw the funds. Consider a fund with low turnover, assuming of course that there is satisfactory investment management. Turnover isn't a tax consideration in tax-sheltered funds such as IRAs or 401(k) s. When it comes to growth stocks, you invest directly, hold for the long term and pay no tax on the appreciation until you sell. Incidentally, no capital gains tax is imposed on appreciation at your death.
Use the Gift-Tax Exclusion to Shift Income
In 2011, you could give away $13,000 ($26,000 if joined by a spouse) per donee, per year without paying federal gift tax. There is no limit; you can give $13,000 to as many donees as you like. The income on these transfers will then be taxed at the donee's tax rate, which is in many cases lower than yours. Be aware that special rules apply to children. Lastly, if you pay the medical or educational expenses of the done directly, those gifts are not subject to gift tax.