The Best 10 Ways to Shield Your Money from Uncle Sam

Over these past few weeks, I’ve shown you several ways to “get make your money back” from all of the holiday shopping you’ve done.

But now, it’s time to protect that money… and I’m not talking about protecting it from rising interest rates or a stock market correction.

I’m talking about Uncle Sam.

With just over one week until we begin the New Year, it’s time to start making your tax game plan.

And these 10 tips will ensure that you keep your hard-earned cash.

The first one may surprise you…

1)  Never buy stocks or funds before the ex-dividend date. You may think that you are setting yourself up to receive a year’s worth of income, but the stock or fund price actually decreases by the amount of the dividend payout after the pay date. This leaves you footing the tax bill on those stocks and other fund you bought to give yourself income.

2) Do not contribute to any qualified plan beyond your company match if you only want a tax deferral. You’re essentially taking a tax loan with unknown and uncertain terms set by the U.S. Treasury Department. What IS certain is that taxes are rising and will continue to do so. The point of your retirement dollars is to save for retirement, not to reduce your taxes now and then pay more in the future.

3) Use your Flexible Spending Account (FSA). FSAs avoid both income and payroll taxes and can be used for medical and childcare expenses. Just make sure you use it before the end of the year. Even though there is currently a small grace period, employers were not required to implement a grace period, so yours may not have one.

4) Gift appreciated stock to your favorite charity (one that will accept appreciated stock). If you itemize your taxes, you will be able to deduct the fair market value of the appreciated stock and avoid paying the capital gains that you would have paid had you sold the stock and gifted the cash. You can similarly gift shares of mutual funds.

5) Avoid the kiddie tax rules and gift securities to adults over age 24 or parents who are in the 10% and 15% tax brackets; there are no capital gains taxes! Give appreciated securities to them for sale without tax – as long as the proceeds do not put them into the next bracket ($37,450 for singles and $74,900 for married filing jointly). Also remember that you can only gift up to $14,000 per person per year ($28,000 if married) without filing a gift tax return, and some states tax capital gains that are not taxed at the federal level.

6) The new 2013 net investment income tax of 3.8% applies to ALL net investment income once your adjusted gross income (AGI) exceeds $200,000 for single filers (or $250,000 for married, joint filers) on rent income, royalties, interest, dividends, capital gains, annuities, passive trade, or business income. ALWAYS include income from trading in financial instruments or commodities, even if such trading is your business but doesn’t include distributions or withdrawals from any qualified retirement plan. If your AGI exceeds the thresholds and you want to realize capital gains, consider gifting the asset to children. Although the income will be taxed at your rate under the kiddie tax rules, it will not be subject to the net investment income of 3.8%. Also remember to file the proper interest and dividend forms on your child’s return – not yours!

7) Consider the alternative minimum tax (AMT) in all of your tax planning. Try to eliminate or reduce triggers that cause it, such as real estate and state taxes, which are not allowed against the AMT. Special consideration is needed when realizing any large capital gain.

8) If you donate a car to charity that’s worth more than $500, require that the charity gives it to a needy individual. You should treat this requirement as a condition of the gift so that if the charity sells it, your deduction will be limited to the charity’s sales price instead of the fair market value of the car.

9) Remember that educational and business expenses (such as trading classes, publications, and software) can be deducted from your income. If you are in business to profit from trading, these are your business expenses.

10) You are giving Uncle Sam an interest-free loan if you get a tax refund every year, which is what 75% of Americans do! Consider increasing your W4 allowances to reduce your withholdings and make the time value of the money work for you – not for the government. Just be careful about not increasing your allowances too high. You don’t want to end up owing money.

One final thought…everyone’s tax situations are different, so always check with your professional tax advisor about the impact of any of the tips I gave you above.

Here’s your trading lesson summary:

If you’ve been trading along with me this year, it means you’re going to have to give some special consideration to your tax plan this year. I sat down with my tax attorney to talk about the ten things traders need to remember as we head into tax season:

  1. You can avoid capital gains by gifting appreciated securities to individuals (with lots of restrictions, so beware) and even charities.
  2. Don’t forget to consider the Alternative Minimum Tax (AMT) in all your tax planning.
  3. Keep in mind that educational and business expenses (such as trading classes, publications, and software) can be deducted from your income.

I’ll talk to you again soon…

Tom Gentile

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