With a potential rise in tax rates on the horizon if Congress doesn't act in the upcoming lame duck session, many people are thinking about their own tax situation, i.e. how to legally keep more for themselves and their families and give less to the government. For those who feel especially patriotic, I've outlined in recent posts how to make gifts to the IRS. I don't know of anyone who has taken me up on the challenge yet. I doubt anyone will, because people's self-interest is to keep as much of their own earnings as possible.
I recently read on Greg Mankiw's blog how tax adverse the Rolling Stones are:
I broach the subject with Keith [Richards] in Camp X-Ray, as he calls his backstage lair. There is incense in the air and Ronnie Wood drifts in and out--it is, in other words, a perfect venue for such a discussion. "The whole business thing is predicated a lot on the tax laws," says Keith, Marlboro in one hand, vodka and juice in the other. "It's why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don't want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out." No wonder Keith chooses to live not in London, or even New York City, but in Weston, Conn. Source(http://www.you.com.au/news/1253.htm)
Anyone attune to modern culture is well aware of all the celebrities fleeing high tax states like New York and California for tax-friendlier locales. But what can the Average Joe do?
- Max out your 401ks. The 2011 contribution limit is $16,500, with an additional catch up contribution for those over 50 of $5,500.
- Max out your IRA contributions if they are tax deductible.
- Capture stock/mutual fund losses prior to the end of the year by selling positions at a loss and replacing with similar invests.
- Purchase low turnover or tax managed mutual funds. Indexes that do little buying and selling help keep the taxman away.
- Consider muni bonds for the income portion of your taxable portfolio. Just be aware that a number of states and municipalities have severe budget challenges.
- Clean out your closets and make a donation to our favorite charity. Just make sure you get a receipt. Charitable donations, be they cash, goods or services, are deductible.
- Participate in your employers flexible spending account for out-of-pocket medical expenses.
- Take advantage of energy tax credits while to last to make your home more energy efficient.
- Live in tax friendly states and localities.
- Defer income to years when adjusted gross income will be lower than normal.
- Consider acquiring rental real estate for the tax advantages.
- Take more income in dividends to harvest the 15% rate.