There are few things I enjoy less than dealing with taxes…
Maybe a bout of stomach flu. Or sitting in the middle seat on a plane while the guy next to me clips his toenails. I think thats about it.
I dont even do my own taxes. I stopped that in the mid-90s when I nearly hurled my computer out of my apartment window in a fit of frustration.
Its not even the paying of taxes that enrages me. I get that roads have to be built, teachers, firefighters and police have to be paid, and Congress needs its five-star health benefits and pensions (dont get me started).
Its the tax planning and organizing that drive me crazy.
When I was young and didnt have any assets, I really didnt think about taxes much. If I had capital to invest, I bought a stock. If I made money, I paid taxes on the capital gains.
Today, Im much more aware that its not what you make, its what you keep. I will pay every dollar that I owe as required by law, but I will also do everything within the law to lower my tax bill.
Id encourage you to do the same – so today, Im sharing three key things you can do to lessen what you owe.
For example, if you contribute $5,000 to an IRA and are in the 24% tax bracket, you will save $1,200 in taxes.
Best of all, you can still contribute to an IRA up until April 15 of this year to get the tax credit for last year. So if you havent contributed to an IRA yet, you still have time to reduce what you owe for 2019.
If you donate money to charity, unless you are itemizing, you are not getting the tax benefit of your donation.
However, if you donate directly from your IRA or 401(k), it will reduce your taxable income. This is something that a lot of people miss.
Lets say your RMD this year is $10,000 and you are in the 24% tax bracket. You will pay $2,400 on the withdrawal. Lets also assume that each year you give $2,000 to charity.
Rather than withdraw the $10,000 and then write a check for $2,000, instead donate the $2,000 directly from your retirement accounts.
You can even donate stock or mutual funds. You dont have to convert it to cash.
If again youre in the 24% tax bracket and you donate $2,000 from your IRA or 401(k), you will save $480 in taxes. Whats more, the $2,000 counts toward your RMD.
Even better, your favorite charity still gets your contribution. Its a win-win-win – for everyone except the IRS.
For example, I put my higher-tax investments, like bonds and other interest-bearing assets, in my retirement accounts. I also put dividend stocks in my 401(k) so that the dividends compound tax-deferred.
But if I am buying a bond and a stock and can fit only one in the retirement account, it will be the bond. Heres why…
Bonds pay interest, which is taxed at your ordinary income tax rate. Stocks pay dividends, which are taxed at 15% for most people.
If you collect $10,000 in bond interest and $10,000 in dividend income and are in the 24% tax bracket, that means youd pay $2,400 in taxes on the bond interest and $1,500 in taxes on the dividend income.
If you are able to put only one of those investments in a tax-deferred account, it should be the bond. Youll save $2,400 in taxes versus $1,500 for the dividend stock.
These three simple strategies allow you to hang on to more of your money to pay for your healthcare and retirement… instead of funding Nancy Pelosis and Mitch McConnells.
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