Adjusting your tax rates and taxable income
June 19, 2012
Every taxpayer has the right to organize their affairs in a way to reduce income taxes.
There are many tax rules and “phase outs” of tax benefits. The “phase outs” have many different income levels.
The adjusted gross income can be reduced so the “phase outs” don’t cause higher income taxes, by simply making various choices.
Some of the choices of actions include:
• Time the sale of assets that will recognize long term capital gains. The current low rates on long term capital gains (held more than one year) are a bargain. For taxpayers that don’t have an income to move past the regular 15 percent tax rate, some or all of the capital gains can be taxed at zero tax rate.
• Reduce taxable wages by making contributions to the retirement plan at work. Contributing not only reduces AGI and taxable income now, but builds retirement savings for you.
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• Consider converting some regular IRA accounts to ROTH IRAs. That will cause taxable income equal to the value at the time of conversion, but in the future, the earnings in the ROTH IRAs will usually avoid income taxes. That’s a delayed benefit for you (and if you pass those ROTH IRAs to your children (or grandchildren) when you die, it is a benefit for them).
• At what age should I start taking Social Security benefits? If you are in fairly good health, it might be best to delay taking Social Security benefits until the normal retirement age or even until age 70. Congress has decided “rich” folks should pay income tax on part of their Social Security benefits. It is not unusual for some folks to have as much as 85 percent of the Social Security benefits to be taxed as ordinary taxable income.
Congress defines “rich” folks as those with “modified adjusted gross income” (most income plus 50 percent of the Social Security benefits) greater than $25,000 for single taxpayers and greater than $32,000 for joint returns.
• Consider accelerating income from future years into the current year. This can be a help in certain situations, depending on the expectation of future income, deductions, etc.
• If you still are employed and under age 65, consider contributions to a health savings account. That is a deduction on page 1 of form 1040 and reduces AGI and taxable income.
It’s a shame tax laws are so complicated with different levels of “phase outs” etc.
Did you hear, “You know you’ve got car trouble when the engine won’t start and the payments won’t stop”?
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.