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Tax Planning Ideas

Convert non-deductible personal interest expense into deductible interest – Generally, interest paid on credit card debt or other personal interest expense is not deductible. However, you can borrow up to $100,000 on a home equity loan to pay off personal debt or use for any purpose and claim a deduction for qualified residence interest. Please note that it may not be beneficial to use this strategy if you are incurring alternative minimum tax.

Take immediate deductions for business equipment additions – a "Section 179" deduction can be taken to expense up to $500,000 in 2011 and $125,000 in 2012 for equipment, furniture and certain other types of depreciable property acquired for business purposes. This deduction begins to phase out if total property acquired exceeds certain limits.

Consider establishing a self employed retirement plan – If you are self employed, consider establishing a self employed retirement plan. There are a variety of plans available which vary in complexity. You may want to consider a SEP IRA which will enable you to deduct up to 20% of your earned income  from self employment. All earnings will grow on a tax deferred basis. A SEP IRA is easy to set up but, if you have eligible employees, they must be covered. A self employed individual can take advantage of a SEP IRA and also contribute to a Roth IRA if you meet the AGI limitations.  Other types of defined contribution plans are also available and can provide a maximum deduction per year of  $49,000 for 2011 for a self employed person. In certain circumstances, a solo 401K can optimize your contribution.

Use like kind exchanges to avoid realization of income – This is particularly useful for "trading up" rental or business properties. You can permanently avoid income taxes on real estate appreciation if you continuously make like kind exchanges throughout your lifetime.

Employ family members in business to put family income in lower brackets – You can take a deduction for wages paid to your children.  In turn, your child can shelter up to $5800 of year 2011 wages from Federal income tax with the child's standard deduction and income above this amount will generally be at a lower rate than the parent.  If you operate as a sole proprietorship, your children under age 18 can be employed without any FICA, Medicare or FUTA payroll taxes.  Remember that the wages paid to the child must be reasonable in relation to the actual work performed.  This strategy works well by hiring your teenage child during the summer or holiday vacations.

Convert taxable interest income into tax free municipal bond interest – With yields on taxable accounts at low levels, many tax exempt bonds offer more attractive after tax returns.

Take advantage of the annual gift tax exclusions – For 2011, you can make gifts of up to $13,000 per year per donee ($26,000 for a married couple) and be exempt from gift tax. This technique can be used to shift income producing assets to your children who are generally in lower tax brackets. However this benefit is limited if your children are under age 18 or a full time student under age 24 since their unearned income in excess of $1900 will be taxed at the parent’s marginal rate.

Gain on sale of a principal residence is tax free - If you owned and used the property for 2 of the last 5 years prior to sale, you can qualify for tax gain exclusion provisions. The amount of tax free gain is limited to $250,000 for a single taxpayer and $500,000 for a joint return. 

Take advantage of the child and dependent care credit – You can recover part of the expenses you incur for day care of your dependent children under age 13. This includes expenses incurred at your home or an outside location. A federal tax credit is available to married working couples or single parents.

College savings plans – Contributions to Section 529 plans are not deductible but earnings and appreciation are tax free as long as withdrawals are used for qualified higher education expenses. You can contribute to any State sponsored plan regardless of where you reside. The beneficiary of the account can attend any US accredited college. Large amounts can be contributed to these types of plans. Gift tax consequences must be considered but up to $65,000 can be contributed in 2011 without gift tax under a special rule.

Coverdell Education Savings Accounts – These accounts, formerly known as education IRA’s, permit contributions of up to $2000 per year. No contribution is allowed if your adjusted gross income reaches $110,000 (Single) or $220,000 (joint). If your AGI exceeds these limits, you can consider gifting the amounts to your child who can set up the education savings account. Amounts contributed are not deductible but all earnings on these accounts are tax free as long as the withdrawals are used for education. These accounts can be used for K through 12 private school tuition.

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IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S federal tax advice contained in this website is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or (b) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should consult with a tax advisor regarding your particular circumstances.