?What to Do Now
to Reduce Your Tax Bill
by Nancy Hecht, CFP

I have often contended that if every working American had to pay taxes the same way the self-employed do, we would have meaningful tax reform in just one quarter. Many working Americans don’t grasp the full girth of their tax bill because it’s deducted from their pay. But if you’re self-employed, you well know that writing a check for your FICA and withheld income tax is painful.

We are in an election year. If you really want to do something for your fellow Americans, your family and yourself, understand the candidates’ proposed tax plans. Get past the rhetoric and the sound bites and find out what the candidates actually intend to do. Don’t think tax legislation is not important. Even if you’re one of nearly 45 percent who don’t pay income tax, tax legislation influences our economy more than almost anything else—and the economy influences your life directly.

There were relatively few tax-law changes in 2007. For tax year 2008 through 2010, if you are in a 5–15 percent tax bracket, you can sell any asset with a long-term capital gain and pay no tax up to the 15 percent tax-bracket limits.

So what can you do to reduce this year’s tax bill? First, fund your payroll-deduction retirement plan such as a 401(k) to the allowed maximum. This is pre-tax earnings, and it’s much more productive to save pre-tax than it is after-tax. Plus, sometimes the amount you save can be enough to drop your adjusted gross income to a lower bracket—which can mean less tax.

Many employers offer the option to participate in payroll-deduction Roth IRA accounts. If your employer does this, take advantage of this option if you’ve fully funded your 401(k). You may also be able to gather additional deductions from Health Savings Accounts, Flexible Spending and similar plans.

Look for opportunities to “bunch” your deductions—the practice of paying more than you owe in a particular year simply to get the deduction. The IRS doesn’t care when the expense is owed—they care when you pay it.

For example, if you regularly make charitable contributions, consider bunching them. Say you regularly contribute 10 percent to a religious or charitable organization, and you also know you’re going to receive a nice bonus or raise this year. In that case, make your 2008 and your 2009 contribution this year (and let the charitable organization know). Your double contribution will help offset your increased income.

The best advice I can give you for this year: Be informed. Election years offer a lot of promise, and taxes are always a hot button. Read up on the candidates’ positions—and then vote. S

Certified Financial Group, 1111 Douglas Ave, Altamonte Springs; 407.869.9800; financialgroup.com.

Nancy Hecht is a Certified Financial Planner and an Investment Advisory Representative with Certified Financial Group in Altamonte Springs.