Tax Avoidance – Getting up to Speed with the New Rules
There is tax evasion, that is illegal and requires that you do things like stash black money away in offshore accounts and bogus companies;and there is tax avoidance, that is just about playin your legal options correctly, to take advantage of tax savings options the law provides you. President Obama is trying to undo years of Democratic and Republican tax cuts that have bankrupted the country and resulted in cuts in essential public services – and the results aren’t pretty. Taxes are going to rise one way or the other.
Joe Public knows that these tax code changes could change his fortunes overnight, and like investors all over, he feels that drastic investment philosophy changes that need to be made. Just in February, ordinary investors moved their money from regular stocks to new kinds of investments like foreign equity funds and tax-free municipal bond funds. And ordinary salaried people are taking their IRAs and turning them into Roth IRAs at breakneck speed for the free pass out of tax that they get. And in their pension planning, lots of high-paid executives are turning down plans that let them pass on cash today for a big bounty later on. Everyone wants cash now, everyone wants to park it someplace safe from the tax man today. Tax avoidance is in style.
Tax planners are certainly having a great time though. They don’t need to convince anyone of how important their services are; they have customers lining up around the block. Almost every tax seems to be rising now, if you look at the list. Nothing seems safe – even income and capital gains rates are going up. Even worse, the unspoken understanding that your salary was to be judged differently from what you made on your investments, is being questioned by the IRS. They are going to be taking your income from dividends and interest in all that, and may begin charging you social security or Medicare taxes on them. What we do know at this time, is that there won’t be any tax raises this year. So there is a little time to prepare our tax avoidance strategies. Let’s just make sure that we don’t jump from the frying pan into the fire trying too hard to avoid taxes, and making big losses in the process.
Here are examples of where the promise lies in a new investment strategy. You make your contribution to your Roth IRA with your income after taxes. So everything you get out of it, comes tax-free. And there will be no tax rises for the future either. If you do it this year instead of deciding to put off those taxes to next year though, you get the advantage of sealing the deal on today’s tax rate.
Company executives are wondering what to do with all the pay and benefits they receive this year. The new Enron rules make sure they can’t cash their options and run off before the sky falls. Their only hope now is to access their benefits and stock options, because these get very lenient tax treatment. If they are to get all the benefits of the lenient tax treatment though, they’ll have to hang onto their stock options for a year or more before cashing it. If you have options that don’t qualify, getting the process started right away would be a good idea.
About two years ago, municipal bonds were paying out twice as much as treasury bonds. Even last year they made their investors 10%. As taxes rise, municipal bonds may not be as insulated as treasury bonds. Most municipal bonds are in excellent condition, and if you invest in a wide variety over several states, you should be safe. The things good hard-working people have to stoop to these days in the name of tax avoidance. Isn’t it enough how much they contribute as it is?