5 Tax Strategies for You and Your Family
It’s tax time once again! Have you started gathering your tax documents yet? Well, you should not waste much time and get started as soon as the month of January is here. Here are a few tax strategies you can use.
They are called tax strategies, which means that they are allowed under the IRS tax code, but you have to take advantage of them.
The basic understanding here is that technically speaking, there is only one IRS tax code with a multitude of sections. This means that the IRS tax code applies equally to all taxpayers.
There is not one set of rules for the rich and one set for the poor. It all depends on how you wish to implement that which is allowed under the tax code. Here are the five tax strategies to consider.
1. IRA Contributions
Just as a reminder, you can add to your IRA account up to the maximum amount per individual of $5,500 if less than 50 years old. You can contribute $6,500 if over 50 years of age. For a married couple, that is between $11,000 and $13,000 total of contribution reducing your tax liability for 2016.
You will have until April 1, 2017, to make that previous year contribution. Understand that you are not eliminating tax liability on this money, you are deferring it until a later year in retirement.
In deferring tax liability to a later date has both pro and con ideas, but for now, you can just claim the deduction. If you do not need the deduction, then consider starting a Roth IRA for income tax-free growth and distribution later in life. One of the better tax strategies you should take advantage of.
2. Open a Limited Liability Company
If you ever wanted to be that business owner or entrepreneur that you always dreamed of then now is the time.
Think about the idea, online or offline that you desire to create a business around. Make it a family business. Include your children.
It could be real estate investing that you always wanted to do, or online email marketing or the coffee shop franchise or some other franchise. It does not matter. As long as it has a viable business purpose and not an alter ego, you are good to go.
So why do this?
The reasons are many, but from a tax reduction strategy, you can start tracking all of your income and expenses as you pursue this business, even part-time. You will use a schedule C or a K-1 form to record this for tax purposes.
The profit and loss from this business will aid in taxes mainly because you are starting to deduct your lifestyle. Even if you show a loss for the first year or two, you are now transitioning from average to above average mentality in the pursuit of your dreams.
3. Hire Your Children
Now that you have started your own Limited Liability Company, consider hiring your children as part of the business. It has to be legitimate work and paid a reasonable salary.
As long as the business is a sole proprietorship or a partnership where the partners are the parents of the children and they are under 18 years of age, there are no Social Security Taxes or Medicare taxes. In addition, you have shifted your income to that of your children for legitimate business work reducing your own tax liability.
4. Buy More Permanent Life Insurance
This strategy is used by the rich and you should as well. The cash value builds up inside a permanent life insurance policy, grows tax-deferred and can be used on a tax-free basis. It does not matter if it is whole life, universal life, variable universal life or indexed universal life.
The idea is to minimize the death benefit and maximize the cash value when setting up your premium payments.
You will be rewarded years from now with a tax-free income source through the distribution of principle and loans. It will also provide an income tax-free benefit to your loved ones in case of an unexpected death.
5. Confirm Basis on Inherited Property
Although not a pro-active strategy, it is one that people overlook. If you receive inherited investment assets, whether stocks or bonds or even your parent’s house or their rental properties, make sure that you claim the step up in basis as the value of the asset.
You can then sell it for that step up in basis without a tax liability.
For example, if your parents purchase a home for $150,000 twenty years ago, and it is now worth $300,000 and they died leaving you the asset, it should be appraised for the value on the day of their death.
You can then sell the property for that $300,000 with no tax consequence. In most cases, children do not want the house their parents own anyway so this is a great strategy for reducing tax liability on inherited property.
As always, you should consult your financial, tax and insurance advisor for any clarification or specifics to your particular situation.