Tax Planning In A Recession

Americans are saving more money. The budget deficit will eventually give way to spending cuts or higher taxes; ergo, we need to prepare for a higher tax environment. Below are twelve ways to save money on taxes during a recession:Tax Planning In A Recession

1. Tax Loss Harvesting – Unfortunately, because of the market decline, we had a lot of losses last year. Fortunately, we captured those losses so that you could use them to offset ordinary income up to $3,000.

2. Pay off Debt – You do not have to pay tax on your savings if you use it to pay down debt. If you save it in CDs or mutual funds you pay tax on gains and interest.

3. Low Turnover – Invest in funds with low turnover and dividends. Exchange traded index funds have extremely low turnover, meaning that they don’t buy and sell within the fund creating capital gains and dividends. Dividend investing may loose its moxy if we see tax rates increase.

4. Take Advantage of Tax Deferral – Use the tax deferral feature of retirement accounts to defer interest on your fixed income or bond investments. By allocating the bond portion of your overall investment plan to your IRAs and 401ks, you defer that interest until retirement.

5. Save in Retirement Accounts – By adding money to your retirement accounts, be it IRA or 401k accounts, you defer income tax on that money until retirement.

6. Use Municipal Money Markets – Sometimes you can’t avoid having some money market positions in a taxable account. If you have large amounts of money in a money market position, like for an emergency fund, put that in a municipal money market to avoid paying state and/or federal income tax on the interest.

7. Take Advantage of Tax Credits – If you are planning on putting savings to good use, add them to your home. Tax credits are available at 30% of the cost up to $1,500 in 2010 for existing homes.

8. Review Legal Structure of Your Business – With business evaluations down, this could be a good time to convert to a C-Corp to an S-Corp with low built in gain tax impact. You could also maximize the impact of loss generating businesses. Sole proprietors may wish to change structure for asset protection.

9. Itemize Deductions Every Other Year – For those of you close to the increasing standard deduction, or who don’t have enough to itemize your deductions every year for one reason or another, you can try to double up some payments in some years. For example, pay your winter property taxes a little late (Jan), and make double charity donations in the same year (Jan and Dec) to increase your itemized deductions every other year.

10. Convert IRAs to Roth IRAs – This could lower your overall income tax burden during distribution and reduce your estate tax.

11. Gift at Lower Values – Right now we can transfer funds to our heirs at lower values than we could have in 2007. If these values increase, they increase at your heir’s tax rates, not yours.

12. Have Kids! – This $1,000 credit may not be feasible for all of you, but I thought I’d bring it up because my wife and I just qualified last year when we had our 2nd child on Dec 18th of last year.

Photo by: Alan Cleaver

About the author

Richard T. Feight, CFP®
Richard T. Feight, CFP®

Among independent financial advisors, Mr. Feight is one of the most well known and highly respected “Fee-Only” financial planners. Since 1997, Rich has dedicated his career to offering low cost “Fee-Only” comprehensive financial planning and investment advice. Rich assists his clients in organizing their finances so that they can retire on time.Rich is a graduate of Michigan State University where he received his degree in Finance. Rich has earned the Certificate of Financial Planning from The College for Financial Planning in Denver , Colorado that was comprised of intense graduate level classes grounding him in the various foundations of financial planning. He is a CFP® (Certified Financial Planner®) since 2001, meeting the experience, education requirements and passing the two-day, 10 hour exam, making him one of the few in the country who hold the designation. Since 2003, Rich has subscribed to the stringent and mandatory annual educational hours, experience, and code of ethics to meet the requirements to be a NAPFA Registered Financial Advisor. Out of the 800,000 individuals in the country who claim they are financial advisors/planners, fewer than 1,300 in the country qualify for the membership; Rich is one of them.

Rich is the President of the Financial Planning Association (FPA) of Michigan . The FPA of Michigan is one of largest and influential chapter in the country. Rich was recently named President for Transportation Toastmasters Club 4776 downtown Lansing . He has been quoted in both local and national media from Noise Magazine to CNBC, and Bloomberg, and industry news publications such as Investment News and Financial Advisor Magazine. Rich enjoys public speaking and has spoke at industry educational meeting, high schools, and executive investment clubs, AARP conferences, and business educational seminars for companies looking to educate their employees. Rich views his role as a Fiduciary for his clients as the single biggest key to any planning relationship and strives to provide the most competent, unbiased and objective advice in the financial planning profession today.

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