1990 1991 : TAX TIPS : Soften the Tax Bite
The government has done its best in recent years to simplify your tax planning to a single step: Prepare to write the check. But there are still a few things many people can do to reduce their annual tax bite. To wit:
* Contribute to a tax-favored retirement plan: Although you can contribute to a 401(k), individual retirement account or a Keough plan at any time during the year to get a tax deduction, investment counselors suggest that you contribute early. Why? The investment earnings on these contributions also accrue tax-free, so the earlier you start, the more you earn.
* Convert taxable investments to non-taxable: If you already invest in stocks and bonds, you might consider converting some of those investments into tax-free issues, such as municipal bonds, to lower the tax on your earnings.
Shift income to your children:
If your children are over the age of 14, you can give them up to $20,000 (for a couple filing a joint return) annually without triggering a gift tax. That allows earnings on that money to be taxed at your child’s lower rate. If the child is under the age of 14, however, he or she can only earn $1,000 annually before investment earnings are taxed at the parent’s higher rate.
* Consider deferring part of your income: If your company offers a deferred income program and you don’t need every bit of your salary right away, consider participating. These programs allow you to essentially lend your company money and defer tax on the income and investment earnings until you withdraw it at a later date.
* Contribute to child-care or medical reimbursement plans: Many companies offer medical reimbursement programs that allow you to set aside a percentage of your income each month in a health-care reimbursement account. This money comes out before tax, so it has the effect of reducing your taxable income. You can use the money to pay medical deductibles, non-reimbursed expenses or for child care. There’s just one catch: You forfeit any money left unspent at the end of the year.
