Minimizing the Effect of the Phaseout
If your family income is high enough to be affected by the phaseout
of itemized deductions, your marginal tax rate may actually be several
percentage points higher than the rates shown on our rate table. The negative effects
of the phaseout can sometimes be reduced by careful tax planning. Reduce
taxable income. The most basic strategy, of course, would be
to reduce your adjusted gross income below the threshold for your
filing status. Business owners can do this more easily than other
taxpayers, because their ability to plow earnings back into the business
is virtually unlimited. Some other simple ways of doing this
include maximizing your contributions to any retirement plans available
to you, or to a nondeductible IRA or Roth IRA. While these IRA contributions
won't lower your AGI for the current year, they will lower your taxable
income in the future because earnings on the accounts are tax-free. Another
simple strategy is to receive investment income in a nontaxable form,
by investing in tax-free municipal bonds. You might also decide to
invest more heavily in non-dividend paying growth stocks, to avoid
receiving currently taxable dividends. You may also want to
consult a financial planner or tax expert who can suggest more specific
ways to trim your current income, including various family income-splitting
tactics, charitable remainder trusts, etc. Reverse planning
for deductions. If it looks as if you're going to lose some percentage
of your deductions anyway, you might want to reduce some of your deductible
expenses. In particular, consider paying down your home mortgage
or refinancing it at a cheaper rate, since the interest deduction
is less valuable to you. If, like many business owners, your
income fluctuates from year to year, you might be able to pay for
more deductible expenses in years when you have lower income and the
deductions are less likely to be reduced.
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Tip Charitable gifts should be made in January
of a low-income year, rather than in December of a high-income year. |
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