10 Top Tax-Savings Ideas

Here are some thoughts from the great personal finance book Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest. They list 10 tips for saving money taxes as follows:

1. Maximize contributions to retirement plans.
2. Consider a Roth IRA conversion.
3. Own a home.
4. Pay attention to how your investments are taxed.
5. Make tax-wise charitable contributions.
6. Make the most of your employer's fringe benefits.
7. Own a business.
8. Look for tax credits.
9. Look for deductions available for nonitemizers.
10. Timing is everything.

Here's how I stack up on these ideas:

1. Check. I've been contributing the maximum amount possible to my 401k for 15 years now.

2. I'm not sure of all the ins and outs of a Roth conversion, but I'm looking into it (and will likely have an upcoming post on it.) I do believe in the tax diversification idea of having some funds taxable and others non-taxable, so the concept of a Roth is appealing.

3. Check. I can deduct property taxes, but I haven't had a mortgage in a looooong time.

4. Taxes are one of the costs you need to minimize to get the best investment return possible. Yet another reason to love index funds.

5. We track our contributions closely and get receipts for every one of them.

6. I already talked about the 401k contributions I make, but I also put away the maximum amount possible in our firm's HSA. Trying to do all I can to minimize taxes.

7. I do own a small business, but it's better at generating income than tax write-offs (which I consider a good thing.)

8. We're working on a nice tax credit right now that I'll update you all on in the future.

9. I itemize. And as far as looking for deductions, I keep my eyes open for anything new and expect the same from my CPA.

10. I don't have a lot of flexibility to play with timing, though I usually do pay my January property taxes a month early to get the donation deduction in the earliest tax year possible.

Comments

[Mark]

Owning a home is one of the worst ways to lose wealth. It requires maintenance and taxes (which means that it is NEVER really paid off). These typically amount to 2-4% of the purchase price every year. Looking past the bubble years, homes have appreciated only 1% above the inflation rate over the past 100 years--not a very good investment. But, people are infatuated with buying and flipping property more than any other asset. It was this behavior which caused the current crisis. I'm doing much better than my peers by understanding that this was a bubble (in 2005) and selling my house and renting ever since. Houses, like stocks, are not really "buy-and-hold" investments at any price--but rather only buy when the price is right and makes sense. In coastal California, buying a house even now is a one-way ticket to poverty through taxation, maintenance, and capital depreciation.

[Param]

pay my January property taxes a month early to get the "donation" in the earliest tax year possible

did you mean deduction instead?

[FMF]

Param --

Ha! Yes, I meant deduction! I'll make the correction, thanks!

[Mark]

I'd be really interested to see the article on Roth IRA conversions. One of my main reasons for wanting to convert is I'd like to keep investing each month in the mutual funds in my current rollover IRA. It would make more sense to me to have all Roth IRA's and then my regular 401k from my current job; as opposed to a Roth IRA, a rollover IRA, and my 401k.

[Old Limey]

You omitted mentioning municipal bonds.

The good news - For taxable accounts, Municipal bond funds are currently the very best, low volatility, sector in the market.
The bad news - they have appreciated so much recently that almost all individual municipal bonds are so far above par that they are not good investments to hold to maturity. This leaves municipal bond funds - they can still be bought but should definitely be timed with a moving average - they are certainly not Buy & Hold investments.

You can either buy them individually at a good price and yield and hold them to maturity which is what I did or you can buy a mutual fund that holds municipal bonds. I loaded up on individual bonds in my taxable account in October 2008 near their low point, the interest I receive (Average is 4.98% tax exempt and AMT exempt) now goes into a municipal bond mutual fund since there are no longer any good buys in individual bonds. Either the coupon rate is way too low for new issues or the price in the secondary market is too far above par.

For IRA accounts the Junk bond sector has been the best, low volatility, sector in the market for the last 6 months but it also must be timed with a moving average, they are never Buy & Hold investments.

The value for moving average should be obtained by backtesting but values around 20-25 work well for many bond funds. Ideally you need your own database and software and follow them daily to do the best job but that will cost you some money - there's no such thing as a free lunch.

[Shadox]

The own a home thing is a home tax incentive. It also happens to be the most regressive form of taxation I can think of right now. Still, you can't argue with reality...

Another great way to reduce capital gains tax: buy and hold index funds. Jumping into and out of the market creates tax liabilities, that can be avoided, and research shows most people get stock market timing wrong anyway.

[Samson Smith]

Great post, I totally agree that this all are the perfect ways to save money on taxes. According to me municipal bond is the great way.