What can I do to reduce my income taxes?Another thought provoking article by Ernie McDaniel - as seen in Forum News. |
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First, maximize your contribution each and every year into whatever tax-deductible retirement plan may be available to you. That might be a traditional IRA if you work for a company with no retirement plan. It might be a 401(k) if you do.
If you are self-employed you may want to consider a Simple IRA or SEP plan, or other such plan that allows you to contribute more than the typical IRA (but that also requires contributions for employees). The various plans have different rules and different annual maximum contributions, so choosing from among them is no small or unimportant task. Seek experienced guidance from a financial professional who cares and in whom you have confidence.
If you work for a hospital or school system, and a lot of folks do, you may want to contribute to a tax-deductible 403(b) plan.
Some non-profit employers, the City of Shreveport for example, have deferred compensations plans. Contributions to these also reduce taxable income and potentially create value for the future as well.
The traditional IRA allows you to make contributions for last year up until you file your tax return. That means you have at least until April 15, 2005 to act, longer if you file an extension.
All of the above plans reduce your taxable income by the amount contributed, and therefore your taxes. How much they reduce your taxes will depend on your tax bracket. Many of them allow larger deductible contributions in 2005 than in 2004.
Beyond these plans that allow immediate reduction of your taxable income, there are others that help you defer tax on the interest earnings of investments over the years. For annual additions to savings greater than the contributions allowed by the above tax-deductible plans, you might consider a tax-deferred fixed annuity.
Please understand, there is no immediate tax advantage, no tax-deduction, with a tax-deferred fixed annuity. Instead, this strategy is intended to defer future taxes on interest earnings. In a sense you are creating decades of deductions, the so-called “deduction” each year in the future being the amount of interest earned that otherwise would have shown up on the current tax return and been taxed. As you near retirement, if you have built substantial savings, that currently tax-deferred interest amount might potentially be even be more than you earn working at your job in a year. That, of course, depends entirely on how much and how long and how well you have invested. Bottom line, though, this potential tax-deferral advantage may be substantial.
Keep in mind that both IRAs and tax-deferred fixed annuities are intended for long-term retirement savings, not short-term savings. Early withdrawals before age 59 _ may be subject to tax penalties. There may also be surrender charges for too-early withdrawal. I suggest you balance your tax saving needs with your liquidity needs.
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