Be Tax Smart

May 2010 – Downtown Business News

Tax time can be frustrating to many because paying taxes means having less to spend on the things that matter most to you. Rather than remaining disgruntled from your 2009 filing, be proactive and take the time today to plan to lessen your tax liabilities for 2010. Get out your 1040 tax return and spend a few minutes reviewing the following questions to see where you may be paying more taxes than what’s necessary.

1. Are you paying excess tax on taxable interest? Check Line 8a on your tax return. If that number is more than $1,000, you can probably save some taxes by moving cash, money market accounts or CD’s that are excess to your emergency money into tax deferred accounts or tax-free bonds. You can save $250 of tax liabilities for every $1,000 on line 8a if you are in the 25 percent tax bracket, for example.

2. Are you age 70 1/2 and want to reduce your tax liability? Check Line 15a and make sure you haven’t forgotten to take the Required Minimum Distribution (RMD) on any of your IRA accounts. Failure to take the RMD on all IRA accounts may result in a 50 percent penalty on the amount you should have taken.

3. Do you really need the income from your Required Minimum Distributions? Check Line 15a and if you could do without this number and still live comfortably, you might consider converting a portion of your IRA to a Roth IRA which does not have RMD’s, can be withdrawn tax free if needed in the future, grows tax free and is passed to heirs income tax free. If you like the idea, you will have to pay a one-time tax on the amount converted but consider where tax rates are likely going and that it may be better to pay taxes now, while the rates are lower.

4. Do you take income from an annuity? Check Line 16a and 16b. If those numbers are the same it means you are paying tax on the full amount of annuity income. Consider structuring the annuity income as a certain term payout such as 20 years or lifetime. This will reduce the tax on the income taken since only a portion of the income will be taxable; the other portion is considered a return of principal (not taxable).

5. Are you paying tax on your Social Security income unnecessarily? Check Line 20a and 20b. If 20b is 50 percent or 85 percent of 20a, your Social Security benefits are being taxed. This is because your total taxable income sources add up to more than $25,000(Single) or $32,000(Married). By applying questions 1, 3 and 4 above you can potentially reduce your total taxable income down below these levels and avoid paying tax on your Social Security benefits entirely.

6. If you own your own business, are you taking advantage of the large contribution limits to a retirement plan to increase deductions? Check Line 28 and see if it matches the amount you could be contributing to reduce taxes by using these types of qualified plans below:

• SEP - maximum contribution is 25 percent of compensation up to $49,000
• Individual 401(k) is up to 25 percent of compensation PLUS $16,500 in salary deferrals ($22,000 if you are over 50 years old)
• One-Person Defined Benefit Plan is up to $195,000

7. Are you making the most of your IRA contributions? Check Line 32 to see if it matches the amount you could be contributing. The maximum contribution is $5,000 if you are age 50 or younger or $6,000 if you are 50 years old and older. If you are in the 10 percent or 15 percent tax bracket consider making your contribution to a Roth IRA instead since the tax savings now may not be worth as much to you as the tax-free growth on the Roth IRA and having a tax-free income source at retirement.

8. Is your mortgage paid off and are you controlling the timing of your deductions to take advantage of the Standard Deductions the IRS provides? Check Line 40a to see if your Itemized Deductions on Schedule A were just less than the Standard Deduction of $5,700 (Single) or $11,400(Married). If so, don’t waste your itemized deductions; double them! Why not pay your property taxes in January and December of the same year, double your charitable contributions in a similar fashion and schedule any medical procedures in the same year to maximize your itemized deductions. Then, take the Standard Deduction the next year and continue to alternate between these two every other year.

Tax planning can be a crucial component in helping you save hundreds or even thousands of tax dollars each year. Be sure to seek the help of a qualified tax or financial professional to ensure the above mentioned strategies are right for you and will be executed correctly.

Michael Reppert, Certified Financial Planner^™ (CFP^®), is Senior Partner of Spectrum Advisors, a Dallas metropolitan area retirement and financial advisory firm. Reppert has more than 25 years of experience in the financial services industry and has received several prestigious industry awards including being named one of the "Top 10 Wealth Managers in Texas" in Forbes magazine by Goldline Research and was designated as "Best of Big D" in D Magazine. In addition to holding the Certified Financial Planner^™ designation, Reppert is also a Registered Investment Advisor, Certified Senior Advisor (CSA), and life and health insurance licensed. He is a member of the National Ethics Bureau and Financial Planning Association, as well as, involved with the Dallas Estate Planning Council and National Association of Insurance and Financial Advisors. He specializes in advanced financial planning strategies for individuals transitioning into retirement or already retired. For more information about Spectrum Advisors visit www.spectrumadvisors.net or call 972.931.3700.