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TAX ISSUES APPLICABLE TO HIGH INCOME TAXPAYERS
As a high income taxpayer, you can be certain of two things:
You pay a lot of taxes each year, and
You are not eligible to take advantage of most tax saving
opportunities that took effect over the last couple of years
To minimize your tax burden, you need capitalize on the tax savings
opportunities that are available to you. A few basic strategies are
included in this newsletter.
How the Federal Government Squeezes Additional Tax
Dollars Out of High Income Taxpayers
If you are a high income taxpayer, you are well aware that you pay a
heck of a lot of taxes each year. The top federal tax bracket is
currently 39.6%. The next highest tax bracket is 36%.
But did you know that if you are a high income taxpayer, you are
actually taxed at rates higher than those listed above? The 39.6% tax
rate and the 36% tax rate are the two top stated tax rates. Actual
tax rates exceed these stated tax rates for high income taxpayers due
to some sneaky rules passed into law by congress a few years back.
Itemized Deductions: Most high income taxpayers itemize their
deductions. If your income exceeds $126,600, you will be required to
"phase out" your itemized deductions. For example, if your
adjusted gross income is $226,600, you would be required to reduce
your itemized deductions by $3,000 [(226,600 - 126,600) * 3%].
Personal Exemptions: For 1999, taxpayers are entitled to claim
a personal exemption of $2,750 for themselves, their spouses, and
their dependents. Single taxpayers whose income exceeds $126,600 and
married couples whose income exceeds $189,950 will need to phase out
their personal exemptions. Single taxpayers whose income exceeds
$249,100, and married couples whose income exceeds $312,450 will not
receive any tax benefit for themselves, their spouse, or their dependents.
So What Can You Do?
Take full advantage of all retirement savings opportunities since
amounts contributed to retirement plans will generally reduce your
taxable income and will grow tax deferred.
Own where you live since mortgage interest and real estate
taxes are tax deductible and, when you sell your home, up to $500,000
of the gain won't be taxed.
Buy and hold a portfolio of stocks and tax-efficient mutual funds
since gains on investment assets held for more than one year before
being sold are only subject to federal income taxes at a rate of 20%.
Have You Been Contributing $2,000 to an IRA Each Year?
If either you or your spouse is covered under a retirement plan at
work, then you are probably not eligible to make a deductible
contribution to an IRA You are probably not allowed to contribute to
a Roth IRA as well. You do have the option, however, of making a
non-deductible contribution of $2,000 into your IRA each year.
The benefit of making a non-deductible IRA contribution is that the
money contributed grows tax deferred. We have clients who have been
making non-deductible IRA contributions for years and have managed to
save quite a bit of money without paying any taxes on the investment earnings.
The downside to this strategy is that if you need the money before
you reach the age of 59 1/2, the earnings portion of the amount
withdrawn will be taxed at your marginal tax rate plus, in most
cases, a 10% penalty. And when you withdraw money from your non-deductible
IRAs upon retiring, the income is taxed as ordinary income instead
of at the lower capital gains rate.
Most of the same tax rules which apply to non-deductible IRAs apply
to variable annuities as well. There are many advantages to investing
in variable annuities, however, which make them an attractive
alternative for people looking to save as much as possible for their retirement.
No Maximum Contribution: Unlike a non-deductible IRA, there is
no limit to how much can be contributed to a variable annuity each year.
Family Protection: Most variable annuities provide protection
in the event the investments made within the annuity decrease in value.
Investment Flexibility: The owner of the variable annuity can
switch among all of the investments offered under the annuity
contract, without being subject to income taxes, fees, and surrender charges.
TO DO LIST FOR MARCH, 2000
Saving and Investing
1999 & 2000 TAX FACTS
For 1999, the standard deduction for a single individual is $4,300
and for a married couple is $7,200. A person will benefit by
itemizing once allowable deductions exceed the applicable standard
deduction. Itemized deductions include state and local income taxes,
real estate taxes, mortgage interest, charitable contributions, and
unreimbursed employee business expenses.
- For 1999, the personal exemption is $2,750. Individuals
will claim a personal deduction for themselves, their spouse, and
- The maximum earnings subject to social security taxes
has been increased to $76,200 in 2000 from $72,600 in 1999.
- The standard mileage rate has been reduced to $.31
per mile as of April 1, 1999 from $.325 per mile previously.
- The maximum annual contribution to a 401(k) plan or
a 403(b) plan has been increased to $10,500 in 2000 from
$10,000 for 1999.
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