Tax deferral strategies
If you’re like most people, then the subject of tax deferment probably never finds its way into your day to day conversation. In fact, only a few people know the many options available to them regarding tax deferment, let alone understand what they offer.
You can actually defer your taxes until a later, more convenient date. It may not be as good as a tax deduction, but it is still powerful in terms of saving money on your taxable income.
Tax deferral simply refers to taking a deduction and moving it into an earlier year or deferring some income to a later year.
Employing these tax deferral strategies yearly will help you utilize the true value of your money and keep it working for you and your family.
When you put money into a retirement plan, it means that you don’t have to pay tax on those dollars until you withdraw the money again. It could be a 401(k), a SIMPLE IRA, or a defined benefit plan.
For business owners, deferring income, accelerating expenses
This is a common one but just in case you are not familiar with it, here’s what it’s about:
When you get to the end of the fiscal year, if you’re having a good year, you might want to defer some of your billings into next year. By deferring your income, a business owner may be able to postpone tax for a whole year and by accelerating their expenses, business owners often get to enjoy tax relief one year earlier.
This also applies to real estate investors. If you have a piece of rental property, and you want to sell it and buy another rental property, you can do a 1031 exchange and not have to pay any taxes, currently on that.
Low turnover Investments
If you possess a mutual fund or an index fund, look at the turnover percentage, because they give you an idea as to how often the investments inside the fund are bought and sold. What you’re looking for is one with a small percentage, like 10%, something like that. Which means they’re only buying and selling 10% of the stocks or bonds each and every year. So there’s not a lot of gain on the sale. On the other hand, if you see a fund that has a 100% turnover, you’re going to be paying a lot of tax on that, even if you don’t need the money.
Cost segregation study for real estate owners
This is a great way to take your depreciation and move it up into earlier years to get more deduction upfront. Remember, we’re talking tax deferral, so we’re actually not creating extra deductions, we’re just taking deductions earlier with all of these strategies, and then that way you don’t have to pay as much tax as you would right now.
Charitable remainder trust
Although a little more complicated, this is a great technique, also for real estate owners or people that have highly appreciated stock. You put the stock into the charitable trust, and the charitable trust sells it.
Since it is tax-exempt, it pays no taxes on the profit and you get a lifetime earning stream, – as long as either you or your spouse is alive – of income and principal. It can be a great way to go, even if you’re not that charitable.
Need help coming up with a great tax deferral strategy? Do not hesitate to reach out to us now.
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