No matter what your financial goals, you should always be looking for ways to cut your tax bill. I find it's fastest to put money in your pocket and enhance your financial situation. With that in mind, here are five of my favorite tax saving tips you can use right now.
TAX TIP No. 1
Eliminate consumer interest
This is the interest that you pay on things like credit cards, personal loans and other consumer loans. It's the interest that eats away at your financial foundation. It is not unusual to pay 18 percent or more in interest on a credit card. If you owe a few thousand dollars at the lofty rate, you could have a financial noose around your neck for years.
Consumer interest may not have been a bad idea when it was tax deductible, but it isn't anymore. My advise is to pay it off as quickly as possible. The way to true financial health is to build wealth through investing, and you can't do that if you are busy paying high interest to someone else.
TAX TIP No. 2
Try to increase your capital gains
If you pay taxes at 28 percent or more, you know how painful it is to see such a large portion of your earnings go to the government. Maybe it's time you started investing in securities that will generate long term capital gains instead. The taxes on such gains can be lower than what you are currently paying on your other sources of income. You earn long term capital gains by selling securities at a profit. A mutual fund that has created capital gains through profitable sales within its portfolio also distributes capital gains to its shareholders at least once a year.
TAX TIP No. 3
Consider swaps
A swap is selling one security for less than what you paid for it and buying a comparable security. The purpose is to create a loss and, therefore, get a tax deduction while remaining in a similar investment. The IRS will not allow you to take a deduction on a swap if you acquire a substantially identical security within 30 days before or after the sale. If you believe a depressed holding has favorable upside potential, you can sell the security and wait 31 days before purchasing it. Just remember, the issue may increase in price before you buy it.
TAX TIP No. 4
Save today for tomorrow
If you work for yourself, you can establish an Owner K or SEP. These are Retirement Plans that allow you to make tax deductible contributions which in turn lower your taxes. If you are not eligible to establish such a plan, consider an IRA. There are different types to choose from such as Traditional or Roth. If your employer has a qualified plan such as a 401(k), take full advantage. These plans can allow you to sock away substantial pre-tax dollars for retirement.
TAX TIP No. 5
Health Savings Accounts
I got this tip from my friends, the CPA's at Crossley, Sanada and Skibinski, LLC. Health Savings Accounts are tax favored savings plans that allow taxpayers to save money for paying medical expenses. Amounts contributed to an account continue to belong to the account holder.
Contributions that are not spent in one year remain in the account for use in subsequent years and earn tax free income in the meantime. Contributions to the HSA accounts are not included in gross income. Distributions are also excluded if they are used to pay qualified medical expenses. To be eligible to establish an HSA, an individual's only health insurance must be provided by a high deductible plan.
A high deductible health plan is a plan that has at least a $1000 annual deductible for self only coverage and a $2000 deductible for families. These amounts are indexed for inflation. In addition, annual out-of-pocket expenses paid under the plan must be limited to deductibles, co-payments and other amounts (other than premiums) that must be paid for plan benefits.
For more tax saving tips, you can contact me at 841-4277 or e-mail me at caperry@wachoviafinet.com.
Carol Perry, a Northern Nevada resident since 1983, represents the firm of Wachovia Securities in Carson City.
