Fair Share
Liz Hoover - Owner , Hoover Financial Advisors
Category: Financial
One thing that unites all Americans is our desire to minimize the taxes we pay each year. It is hard to part with a portion of our hard earned paycheck each week and it is especially hard when we are caught on April 15 owing an unexpectedly large amount!
Some ideas for minimizing taxes include:
• Buy a home versus renting. Mortgage interest is tax deductible.
• Save for retirement in your employer’s 401-K or 403-B plan. Your savings reduce your taxable income. Try to save at work at least up to the level that your employer matches. Your employer’s contribution is free money for you – maximize it! The most you, as an individual, can save in your 401-K or 403-B in 2006 is $15,000 ($20,000 if you are over 50). Check your pay stub to see if you are maxing out this pre-tax savings for 2006 – the maximum amounts just went up January 1!
• If you own a home with extra equity, arrange for an Equity Line of Credit. You do not have to use it but it is nice to have this for emergency purposes. You can deduct home equity loan interest off your taxes on loans up to $100,000. Remember, it is very difficult to get a line of credit after you lose a job or have a medical emergency that causes a disability. Be prepared in advance for emergencies.
• Keep track of deductible expenses each year: charitable donations; medical expenses – in case they exceed 7.5% of adjusted gross income; state and local taxes paid the prior year; general sales tax paid on big ticket items (it adds up!); real estate taxes; allowable home office or business expenses;
• IRAs are a great way to save for retirement. Non-working spouses and employees without a company 401-K or 403-B can save and deduct $4,000 from taxable income in 2006 ($5,000 if you are over 50). Small business owners can set up a Simple IRA plan that will allow employees to save up to $10,000 individually in 2006 that is excluded from their taxable income ($12,500 if you are over 50). If you would prefer to pay your taxes today and avoid taxes on the growth on your investments in retirement then the Roth IRA is the way to save. Roth IRAs work best for families with an adjusted gross income of less than $150,000 or for individuals with AGI less than $95,000. The benefits are phased out above that point.
• Investment planning can also minimize taxes. $3,000 of net long term capital losses can be deducted each year right off of ordinary income on your tax return. Capital losses can also be used to offset gains from other investments. Municipal bond interest is tax exempt in Indiana from both state and federal taxes no matter which state the interest comes from. In retirement, using some tax deferred investments (where you owe tax on everything taken out each year) and some non-qualified investments (non-retirement investments where you only owe on the investment growth) may allow you to reduce taxes or stay in a lower tax bracket.
• Make gifts to charities with appreciated stock. You may get the full market value as a charitable deduction and you and the charity both avoid paying capital gains tax on the appreciation.
• Some year end planning ideas include:
-Pay state income or property taxes prior to 12/31 to get the deduction earlier.
-Spend your flexible spending account from work by 12/31 – otherwise your company keeps it.
-Ensure you take all tax deductions and credits due to you each year.
Liz Hoover, CPA is the owner of Hoover Financial Advisors in Indianapolis. She specializes in financial plan design for families and small business owners. She can be reached at (317) 871-8578 or see her website at www.HooverFinancialAdvisors.com.
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