Discussion

Discussion 2 Responses Instructions

Peer Posts Instructions

Please respond to at least two peer posts based on this week’s topic listed below. Your response posts should demonstrate analysis and extend meaningful discussion. Please including at least 1 credible source:

Topic: For this week’s discussion, suggest some tax strategies that you might use to legally reduce taxes. 

POST FROM CLASSMATE#1There are different tax strategies that can be used to reduce taxes legally. One such strategy is maximizing deductions on the taxes that you owe. This can be done a couple of ways: you could accelerate or bunch deductions into one year if it allows you to itemize, schedule unreimbursed elective medical procedures in one tax year to exceed the 7.5% of AGI needed for deductions, or even increase discretionary deductions in giving more to charitable organizations (Billingsley, Gitman, & Joehnk, 2020, p. 118-119). Another strategy is income shifting, which is where a portion of one’s income and the associated taxes are shifted into a lower tax bracket. There are a few different ways to execute this strategy, such as creating trusts or custodial accounts, as well as making gifts of income-producing property to family members (Billingsley, Gitman, & Joehnk, 2020, p. 119). In making gifts to a child, it should be considered how the kiddie tax, gift tax, or financial aid qualifications will impact the transfer. Another way to defer or even avoid taxes is through certain investments. Interest income on municipal bonds is not taxed federally and may even bypass state income tax as well. Taxes can also be deferred (delayed to a further date) through paying into a traditional IRA, as well as other retirement plans, pensions, and annuities (Billingsley, Gitman, & Joehnk, 2020, p. 120). Some additional considerations for achieving lower taxes would be contributing to a Health Savings Account (HSA) for your family, paying into a separate spousal IRA account, or, in the case of a split household family, potentially filing as Head of Household rather than Single or Married Filing Separately (Grossbard, 2020).

Billingsley, R., Gitman, L. J., & Joehnk, M. D. (2020). Personal Financial Planning (15th Edition). Cengage Learning US. https://reader.yuzu.com/books/9780357438633 (Links to an external site.)

Grossbard, A. S. (2020, December 21). The Most Effective Tax Strategies to Reduce Taxable Income. Wealthfit.com. Retrieved from https://wealthfit.com/articles/tax-strategies/

POST FROM CLASSMATE#2:There are a few strategies that you can use to legally reduce your taxes. The first thing everyone should do is gather the needed information for itemized deductions and determine if this is greater than the standard deduction. Ensuring you are capturing all medical, vision, and dental related expenses for consideration is important. Pulling information for any other tax-type items paid, including sales taxes, personal property taxes, and real property taxes. Additionally, interest on mortgages and, sometimes, interest on equity loans can be considered.  Capturing expenses related to volunteer work or qualified donations can help reduce one's tax liability. Don't forget the travel costs to/from medical appointments or procedures and volunteer engagements.Another way to lower one's tax liability is utilizing income shifting. "Here, the taxpayer shifts a portion of his or her income, and thus taxes, to relatives in lower tax brackets." (Billingsley, 2021). Shifting income to teenaged children could help lower a parent's taxes owed.Hiring your children could be another way to lower one's tax liability. Per ProfitableVenture (2020),Hire the kids: in order to reduce your tax you can hire your children and set up a direct transfer of their pay to a tax-sheltered 529 college plan or Roth IRA. The first $6300 they earn will be tax-free for them because they will get an equivalent standard deduction on their return.Additionally, other creative ways that could lower one's tax benefits are getting married, purchasing a home, and/or having children. There are different thresholds and reduction amounts for single versus married individuals. There are also childcare credits and dependent tax credits that could be utilized for children. (Although, as a parent of two, actual expenditures on children are much higher than any tax savings one might see.)Saving money for retirement, contributing to a 401k or 403b, placing money in an FSA or HSA, and starting a 529 plan can also assist in lowering one's tax liabilities.If you have investments that are losses, sell them before December 31st so that you can use the capital-losses to offset gains. If these exceed the $3000 limit, ensure you carry forward additional losses to future years.The key to lowering one's tax liability is to think through the issues and plan. Organization and advance preparation will prove vitally important in this process.

References

Billingsley, R. S., Gitman, L. J., & Joehnk, M. D. (2021). Personal Financial Planning. 15e. Cengage

50 best ways to reduce taxes for high income earners. ProfitableVenture. (2020, December 12). Retrieved May 18, 2022, from https://www.profitableventure.com/reduce-taxes-high-income-earners/

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