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Tax Efficient Savings

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Tax Efficient Savings. Sources of tax free savings, tax exempt savings and tax deferred savings. Why pay taxes when you do not have to?

Tax Free Savings Account

Qualified Retirement Plans and IRAs

There are many tax free savings accounts that allow for tax-deferral by definition: qualified retirement plans, 401k tax savings accounts, individual retirement accounts, executive compensation plans, tax-sheltered annuity plans are just some of the examples.

Deferring taxes indirectly saves on taxes, as the time value of money is in itself important. In some cases, you may even be able to defer taxes indefinitely.

Tax Exempt Savings Plan

Series EE Savings Bonds

If you hold Series EE U.S. savings bonds, you can also determine whether you would be taxed on the increase in the value of your bonds. If you simply take no action on the bonds, you can postpone paying tax on the increases until the bonds mature or are redeemed.

Alternatively, another advantage you should note is that the accrued interest on Series EE bonds redeemed to finance qualified higher education expenses for the taxpayer, the taxpayer’s spouse or the taxpayer’s dependents will be excluded from gross income. However, this exclusion is only valid if the bonds are redeemed in the year the qualified higher education expenses are paid.

Tax Deferred Savings

Defer taxes till death

Another powerful means of tax efficient savings: As Hallman and Rosenbloom suggest, taxes on capital gains can be avoided entirely if the property gets a stepped-up basis at death. How does this work?

Stepped-up Income Tax Basis

Investors can simply hold appreciated property all the way; should they pass away, the property will get a stepped-up income tax basis equal to its fair market value on that date. Thus, investors can pass the appreciated property on to the heirs free of capital gains tax.

Nonetheless, note that effective of 2010, EGTRRA repealed step-up in basis and provided that recipients of property at death receive a basis equal to the lesser of the decedent’s basis or the fair market value of the property at death. However, the executor can increase this basis by up to 1.3 million in most cases, or by up to 3 million if passed in a qualified terminable interest property trust or to a surviving spouse. ***C2_invitation_21464505***

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