The government often designs the tax code to encourage certain behaviors while discouraging others.
Let’s say it’s early April. An individual client (or family) has handed over their documentation. You’ve prepared their taxes. They find themselves paying more, probably because some deductions have either been capped or vanished.
They ask: “What can I do?” If they are dual-income wage or salary earners getting 1099s, have children in school and own their home, there’s not a lot that’s going to make a big difference.
Does their income flow from various sources, or are they are ready to retire or make a major lifestyle change? Depending on the answer, there are some steps they can take:
Defer income. This should work for high-earning executives getting a salary and bonus. Can they elect to take that income a few years from now?
Closely track business-related expenses. This home-based business needs an in-house office space, computer equipment, furniture, office supplies and stamps. Keep track of everything you are spending. Mileage is also important if you use your own car for business-related trips or errands.
Rent out vacation property. You bought the house at the shore when the children were young. They’re grown now. You visit a few times a year during the off-season, when traffic isn’t a killer. You are paying property taxes, bumping up against the deductibility limit. Suppose you rented it out instead? You can still use it 14 days a year, or 10 percent of the total days rented. Now the property is considered a business, fitting it and its costs into another category.
Challenge tax assessments. This one’s pretty limited. You need to be confident your neighbor’s houses are assessed far lower than your property. Forbeswrote up a sequence of steps to follow.
Find out if your state distributes a lot of college grant money. Higher education is expensive. New Jersey, California and Wyoming distribute the most aid to low-income students. These are Pell grants, sure, but it’s important to recognize California and New Jersey have high property taxes. If you live there, it may help reduce college education costs. You aren’t saving on taxes, but you are saving somewhere else.
Don’t collect Social Security. If you don’t need the income, you can get a higher amount in the future if you elect not to collect it now. The earliest you can start collecting is age 62, but you only collect 75 percent of your maximum monthly benefit. If you start collecting at 66, you get 100 percent of your monthly benefit. Delay longer, and the benefits increase up to age 70.
Retire to a lower tax climate. Your client might live in a high-tax state because they had a high-paying job. If they are retiring and the high income is no longer there, the high taxes and cost of living aren’t going away. They might consider moving to one of 25 cities MoneyTalksNews highlighted as the best places to retire.
Bottom line: There is no easy way for people earning a salary to reduce their taxes by that much. If you have income from other sources or are considering a lifestyle change, there’s scope for improvement.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.