Show #379 Airing Sunday, 3/17/07
Are your IRA’s making you I - R - ate (that’s Irate) at tax time? Wouldn’t you like to use your IRAs to beat the IRS? Joining us this morning to discuss tax saving strategies is Tony Mercuri from Ta-Check Tax Service.
Question: When we take money from an IRA, we pay income tax. Is there any way to avoid the tax?
<span class="QA">Answer: </span>If you take money out to give to charity, you get a tax deduction to offset the tax on the withdrawal. In other words, you can avoid tax on the withdrawal. This is not new, but it only works if you itemize instead of taking a standard deduction. And most older people do not itemize.
Question: But now there's a new way to avoid tax even if you don't itemize?
<span class="QA">Answer: </span>Right! Beginning this year, you can actually have a distribution from your IRA paid directly to the charity of your choice, and not pay any income tax on the distribution. This is not a deduction, so you don’t have to itemize to get the benefit. Anyone can do this. It’s a great chance to donate to a charity and have Uncle Sam effectively subsidize it.
Question: If you itemize, can you avoid tax and also claim that charitable donation as a deduction?
<span class="QA">Answer: </span>Unfortunately no, that would be double dipping and they do not allow that. If you are itemizing and want to avoid tax, we would have to do a comparison to see which would be more advantageous to you: the deduction, or avoiding tax on the withdrawal.
Question: Any other way to avoid paying income tax on IRA withdrawals?
<span class="QA">Answer: </span>As you know, anytime you take money from a retirement account you need to pay taxes on the distribution. The money is taxed at your income tax rate.
If you have company stock in your retirement plan that his highly appreciated, you may have a better option. Net Unrealized Appreciation is a way to take highly appreciated company stock out of a company retirement plan and pay capital gain tax rates on the money as opposed to income tax rates. It doesn’t avoid all tax, but the big advantage is capital gains tax rates are much lower then income tax rates. This technique could potentially save you a lot of money.
Question: Getting away from IRA's, didn't we lost some important tax breaks?
<span class="QA">Answer: </span>Three popular tax breaks technically died at the end of 2005: deductions for state sales taxes, educators’ classroom expenses, and college tuition and fees. I’m glad to say that all three were resurrected at the very end of 2006 and are back in force through 2007.
Question: Any other changes?
Ansewer: Coming in 2008 you will be able to roll over a company plan directly into a Roth IRA. Currently you have to roll it over to an IRA and then convert it to a Roth. So the new law would make this easier with less paperwork.
Soon after that, $100,000 income limitation on whether or not you are eligible to convert an IRA to a Roth IRA will be eliminated, so anyone could convert.
Make sure the tax laws work for you! For more information on money saving tax strategies, give Ta-Check Tax Service a call. The number's up next. My thanks to Tony Mercuri.
