Question of the Week – July 11th, 2024

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QUESTION:

What are some ways that my clients can lower their taxable income?

RESPONSE:

Your clients can lower their taxable income through several strategies:

1. Retirement Account Contributions: Encourage your clients to maximize contributions to their retirement accounts such as IRAs and 401(k)s. These contributions are typically made with pre-tax dollars, reducing taxable income[1][2][3][4].

2. Health Savings Accounts (HSAs): If eligible, clients can contribute to HSAs, which offer triple tax advantages—contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are not taxed[5].

3. Tax-Efficient Investments: Investing in tax-efficient vehicles like municipal bonds can provide income that is often exempt from federal income taxes, and sometimes state and local taxes as well[6].

4. Strategic Asset Sales: Advising on the timing of asset sales to manage capital gains can also help in reducing taxable income. This might involve holding assets long enough to qualify for long-term capital gains tax rates, which are lower than short-term rates[7].

5. Charitable Contributions: Making charitable donations can reduce taxable income, especially if large donations are itemized on tax returns[8][9][10].

6. Deductions and Credits: Ensure clients are aware of all deductions and credits for which they are eligible, such as education expenses, mortgage interest deductions, and energy-efficient home improvements.

These strategies can be tailored based on individual financial situations and goals, helping to minimize tax liabilities effectively.

References
[1] 15 Strategies For Building Tax-Free Retirement Income [Forbes]

Potentially the best strategy for not only tax-free income in retirement but also tax minimization post RMDs is for retirees to convert some IRA assets to Roth IRA after retirement but before RMDs, using current versus projected tax assumptions as the guide. https://www.forbes.com/sites/forbesfinancecouncil/2024/07/09/15-strategies-for-building-tax-free-retirement-income

[2] 15 Strategies For Building Tax-Free Retirement Income [Forbes]

By exploring options like health savings accounts, bonds and retirement accounts, you can set yourself up for success with tax-free retirement income. https://www.forbes.com/sites/forbesfinancecouncil/2024/07/09/15-strategies-for-building-tax-free-retirement-income

[3] 15 Strategies For Building Tax-Free Retirement Income [Forbes]

This reduces your taxable income, and the proceeds from these sales can be reinvested. https://www.forbes.com/sites/forbesfinancecouncil/2024/07/09/15-strategies-for-building-tax-free-retirement-income

[4] 15 Strategies For Building Tax-Free Retirement Income [Forbes]

Reduce Your Taxable Income https://www.forbes.com/sites/forbesfinancecouncil/2024/07/09/15-strategies-for-building-tax-free-retirement-income

[5] 15 Strategies For Building Tax-Free Retirement Income [Forbes]

By exploring options like health savings accounts, bonds and retirement accounts, you can set yourself up for success with tax-free retirement income. https://www.forbes.com/sites/forbesfinancecouncil/2024/07/09/15-strategies-for-building-tax-free-retirement-income

[6] 15 Strategies For Building Tax-Free Retirement Income [Forbes]

By exploring options like health savings accounts, bonds and retirement accounts, you can set yourself up for success with tax-free retirement income. https://www.forbes.com/sites/forbesfinancecouncil/2024/07/09/15-strategies-for-building-tax-free-retirement-income

[7] 15 Strategies For Building Tax-Free Retirement Income [Forbes]

This reduces your taxable income, and the proceeds from these sales can be reinvested. https://www.forbes.com/sites/forbesfinancecouncil/2024/07/09/15-strategies-for-building-tax-free-retirement-income

[8] Abusive Trust Tax Shelters And Charitable Foundation Lead To Indictments In Conner [Forbes]

This is no good from the trust scammer’s viewpoint, however, as their clients just want to avoid taxes but not actually lose control of their assets. https://www.forbes.com/sites/jayadkisson/2024/07/09/abusive-trust-tax-shelters-and-charitable-foundation-lead-to-indictments-in-conner

[9] Abusive Trust Tax Shelters And Charitable Foundation Lead To Indictments In Conner [Forbes]

What the promoters of these schemes do is to tell their victims that they are not the tax grantor (even if they are) and therefore income tax can be lawfully averted by transferring income to the trust. https://www.forbes.com/sites/jayadkisson/2024/07/09/abusive-trust-tax-shelters-and-charitable-foundation-lead-to-indictments-in-conner

[10] Abusive Trust Tax Shelters And Charitable Foundation Lead To Indictments In Conner [Forbes]

The family foundation then “loaned” this 98% of the income back to the clients tax-free, and thus all the tax was avoided — just not lawfully. https://www.forbes.com/sites/jayadkisson/2024/07/09/abusive-trust-tax-shelters-and-charitable-foundation-lead-to-indictments-in-conner

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