Friday, December 4, 2009

Taxes Are Going Up---What Can You Do?

Well, like I've been predicting, taxes are going up. Here's the latest, from CNN:

The problem is that tax increases es are being labeled as going on "the rich." First of all, who are "the rich?" I think we have a concept of robber barons of the 19th century, or industrial capitalists, like Andrew Carnegie, or maybe Wall Street "fat cats". So we just see the label don't think through what's going on, since after all, we don't fit our own preconceptions of "the rich."

Reality is that many of these new taxes and tax increases actually hit everyone. Or many people. It is imperative to do everything in your power to reduce your tax liability.

Number one: retirement savings. If you have a tax rate of 30%, you get an immediate return of 30% (plus the annual rate of return of the investment) on your initial investment. So you put $1000 into a retirement account. You get your $1000, plus you've saved 30%, or $300, on taxes. Even if you put your money into a fixed annuity that's paying 3%, you've got a first year net gain of 33% or $330.

If you are a business owner, you should also be funding a Keogh Plan. Business owners can shelter or $49,000 of their income (which ever is smaller) in a Keogh retirement plan. Going back to the example of a 30% tax rate, the business owner saves $14,700 in taxes plus gets $1,470 in interest, gaining $16,170 the first year.

Look at it this way: if you are a business owner and have the choice of buying a new car for personal use or funding a Keogh Plan, if you buy the car, you've just paid 30% more than it's list price because you can't take the cost of the car off of your taxes. Likewise, if you have a choice between funding your IRA this year or going on a really nice vacation, and you take the vacation, well that has just cost you 30% more than what you paid for it.