Tips to cut your tax bill
Taxes. No one likes to pay them, but there isnt anything you can do about them.Or is there? Fortunately, there are several tax saving strategies that you can use right now to cut your tax bill.Consider municipal bonds. Municipal bonds used to be the domain of the wealthy, but not any more. Many middle income investors find themselves paying enough tax each year to make municipal bonds a worthwhile investment.Are municipal bonds right for you? To find out, identify the percentage youd need from a taxable bond to equal the after tax yield you can earn from a comparable municipal (one with the same maturity date and credit rating). To do this, divide the tax free yield by 1 minus your tax bracket.For example, assume youre looking at a municipal with a 5 percent yield and you pay 28 percent of your income to the federal government. You would divide 5 percent by 0.72 (1.28) to obtain your answer. Youd have to earn 6.94 percent from a taxable investment to equal the 5 percent tax free yield from a municipal. If you cant find a taxable bond you like that can generate a yield of 6.94 percent or better, a muni may be right for you.Contribute the maximum to your retirement plan. Contributions to a corporate retirement plan are generally made on a pre-tax basis, which means you will receive a portion of the money you contribute after filing your tax returns. For example, assume that youre in the 28 percent tax bracket and you make pre-tax contributions of $10,000 annually to your employer sponsored retirement plan. To better understand the benefits of pre-tax retirement investing, in order to invest $10,000 after tax, you would have to earn $13,889 ($10,000 divided by 0.72).Retirement plans also have another valuable feature. Earnings grow tax deferred as long as they remain in the plan. When earnings are free from immediate taxation, they grow much faster than if taxed every year.For example, a $5,000 annual investment in a tax-deferred account would grow to more than $566,000 (approximately $408,000 after taxes) in 30 years (assuming an 8% annual return) — but the same amount invested at the same rate in an account taxed at 28% would grow to less than $379,000. This is a hypothetical example used for illustration purposes only. It does not represent any specific investment.Discover the world of annuities. If youre seeking tax deferred income, annuities can be prudent choices. An annuity is a contract between you and an insurance company that provides periodic payments for a specific period of time. Issuers of fixed annuities guarantee principal and interest. The guarantees, however, are based solely on the financial strength and claim-paying ability of the issuing insurance company. Unlike retirement plans, theres virtually no limit to the amount you can contribute in an annuity, and youre not required to start withdrawing money at age 70.Get the professional help you need. These are just a few of the many tactics that may help you reduce your taxes significantly. Before taking any action that would have tax consequences, talk with your tax professional as well as your financial adviser.The accuracy and completeness of this material are not guaranteed. The opinions expressed are those of Fraser M. Horn and Dudley M. Irwin and are not necessarily those of Berthel Fisher or its affiliates. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. Provided by courtesy of Fraser M. Horn and Dudley M. Irwin , investment adviser representatives with Berthel Fisher in Edwards.Registered Representative of and securities offered through Berthel Fisher & Company Financial Services, Inc. (BFCFS). Member NASD/SIPC. 1st & Main Investment Advisors is independent of BFCFS.