A Management in a Minute Book Overview of The Only Investment Guide You’ll Ever Need by Andrew Tobias

Tax Strategies

The truth is taxes drag down your investment results; however, there are many things you can do to lower your tax liability. One way to do this is through your children. You can save your money using your children’s names and social security numbers and let them pay taxes on the compounds. They will generally be in a much lower tax bracket and each parent can give each child up to $13,000 each year without having to pay a gift tax. There are a few disadvantages, such as the complication of each child having to file a tax return and the risk that the money now belongs to them and they technically can do what they want with it; however, if done the correct way, you can save a very large amount of money in taxes this way.

Another way to save money in taxes is through a Roth IRA. If your adjusted gross income is less than $105,000, then you can contribute up to $5,000 a year to one. Doing so is a very smart decision because you are only taxed on your contribution and when you withdraw from your Roth IRA it is completely tax-free. The difference between a Roth IRA and a traditional IRA is when you are taxed. If you have a low tax bracket and expect it to go up, then you should choose a Roth IRA to pay less tax; however, if you are in a high tax bracket and expect it to go down in the future, you should choose a traditional IRA because that money is taxed when you withdraw instead of when you contribute.

Annuities are similar to IRAs except they are a bad idea. You can contribute as much as want, but you get no tax deduction. There are several specific reasons why you should stay away from annuities. The first reason is that annuity income is fully taxed as you withdraw. So, you never get any tax savings with them. Another reason is because they usually have an alluring rate promised to you, but these rates generally are only for one year. Another reason is because once you buy an annuity, if you want access to your funds before the age of 59 ½, you will have to pay a penalty.  Also, any appreciation with an annuity is subjected to income tax, even if it’s after you die.

A few more ways to lower the amount of income tax you have to pay is with stocks and through charity. There are two tax advantages to stocks. First, even if you gain in your stock, it isn’t taxed until you actually sell it and receive the income. Second, long-term capital gains and qualifying dividends will have a lower tax rate than ordinary income. Finally, giving to charity can save you money in taxes. This works even better if instead of giving cash, you give appreciated securities. Then, you get the tax deduction for not only the gift itself, but also the capital gains tax you would have had to pay otherwise.