Useful Information

Tax Tips

Tax planning is an activity that is best pursued year-round. You can use the following list of tax strategies to help you better carry out your planning on a regular and ongoing basis.

Before-Tax IRA Earnings

Contributing before-tax earnings to an IRA account can make a big difference in your retirement savings, since you can defer paying taxes on whatever your investment earns in an IRA. If your investment pays dividends or has capital gains distributions (such as some mutual funds), you avoid paying taxes on these gains. If you expect your tax rate to drop after your retirement, because you have less income, your savings could amount to an even bigger nest egg.

You may contribute up to $4,000 of your earnings or up to $5,000 if you are age 50 or more. If your modified AGI is above a certain amount, your contribution limit may be reduced.The limit is scheduled to increase to $5,000 for 2008. The limit will be indexed (increased with the rate of inflation) in $500 increments starting in 2009.

If you earn an income from wages or your own business and you’re under the age of 70-1/2, you can open a traditional IRA. For lower income earners, the contribution itself may be deductible. Contribution can be made for the prior tax year up until April 15.

But you may find that other tax-deferred retirement investments are a better deal. Some other options are described below. The IRS publication (590) is available at this link.


A "Simplified Employee Pension IRA" is a tax-deferred retirement plan provided by sole proprietors or small businesses, most of which don't have any other retirement plan. Contributions are made by the employer, and unlike the traditional IRA, can be as high as 25% of each employee's total compensation, with a maximum contribution of $44,000. For a sole proprietor, this can be a significant opportunity to save for retirement on a tax defer basis. Employees with SEP-IRAs can also invest in regular IRAs.

Aside from the higher contribution limits, SEP-IRAs are subject to the same rules as a regular IRA. Contributions and the investment earnings can grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.

401 (k)s

A 401(k) plan is an employer sponsored plan that lets you contribute a percentage of your salary to a trust account, putting off any taxes on that money until you withdraw it, usually after age 59 1/2. Companies often match some of your contribution, and any taxes on those matching funds are also deferred, as long as the total going into the account does not exceed the limit for the year. Like with IRAs, the earnings in the account grow, tax free, until you withdraw the money, and if you expect your tax rate to drop after your retirement, because you have less income, your savings could amount to an even bigger nest egg.

Through automatic payroll deductions, you can usually contribute between 1% and 25% of your eligible pay on a pre-tax basis, up to the annual IRS dollar limit of $15,000 ($20,000 if you're age 50 or older). In this case, you are making salary-reduction contributions that reduce your take home pay, but also your income tax basis, a significant tax break vs. “after tax” investments.

There are typically IRS penalties associated with early withdrawal of 401(k) assets, but many plans allow you to borrow against your assets. If you leave an employer, you may be able to keep your plan with the employer, or “roll it over” into an IRA, avoiding these penalties. Consult your plan administrator for details.

20% Withholding on Distributions from Qualified Employer Plans

Income tax withholding may apply to distributions made from qualified employer plans. Withholding at a rate of 20% is required on a distribution, unless it is transferred directly from your employer to an IRA trustee or another employer plan. The withholding rules do not apply to distributions from IRAs or Simplified Employee Pensions, also known as SEPs. However, if you wish to rollover a qualified plan distribution to an IRA, be sure to transfer the amount directly from your employer to an IRA trustee or another employer plan. Otherwise, 20% of the distribution will be withheld while 100% of the distribution must be rolled over within 60 days. If you don't have the money to cover the 20% shortage, income taxes and possibly a 10% penalty will be due on the amount not rolled over.


A ROTH IRA, is in some respects the opposite of a traditional IRA: You pay taxes on the money that you put into the account up front, but once you reach age 59 1/2, (after having had the Roth IRA for five years), you can withdraw the money, including interest earned, tax free.

For some people, paying taxes now to enjoy tax-free income later may actually make more financial sense in the long term. For one thing, the Roth IRA lets you shelter more money for retirement. The annual contribution limit is the same for both a traditional IRA and a Roth IRA, but because your Roth contribution is made with after-tax income, your annual contributions can compound substantially over the years without incurring any future tax liability

Whether the Roth IRA is a better option really depends on what you think your future tax rate will be. If you plan to maintain a high levels of income even in retirement, it may make more sense to pay taxes on your contribution today, while you're still employed, so you can enjoy the tax-free withdrawals later.

To contribute to a Roth IRA, you must have compensation (e.g., wages, salary, tips, professional fees, bonuses). Your modified adjusted gross income must be less than:

Married Filing Jointly
Single, Head of Household, or Married Filing Separately (and you did not live with your spouse during the year).

There is a partial phase out for married filing jointly beginning at $150,000 and for others beginning at $95,000.

IRA Withdrawals to Pay Medical Expenses and Medical Insurance

You generally pay a 10% penalty if you withdraw funds from your IRA before a certain age. However, you may not have to pay the penalty if the withdrawals are used to pay unreimbursed medical expenses that are more than 7 1/2% of your adjusted gross income. If you lose your job, you may be able to withdraw funds from your IRA without paying the 10% penalty if the withdrawals are not more than the amount paid for medical insurance for you and your family.

Health Savings Accounts (HSA) and Medical Savings Accounts (MSA).

For small businesses and the self employed, an MSA is a tax-exempt account established for the purpose of paying medical expenses in conjunction with a high-deductible health plan. Like an IRA, an MSA is established for the benefit of the individual, and is “portable”. Thus, if the individual is an employee who later changes employers or leaves the work force, the MSA does not stay behind with the former employer, but stays with the individual.

A small business for this purpose is defined as an employer who employed an average of 50 or fewer employees during either of the two preceding calendar years is considered a small employer.
A “high-deductible health plan” is a health plan that:
(1) has a minimum annual deductible of $1,100 for individual (self-only) coverage; or
(2) has a minimum annual deductible of $2,200, for family coverage (coverage of more than one individual).

In addition, the annual out-of-pocket expenses under the plan cannot exceed $5,000 for individual coverage and $10,000 for family coverage, Out-of-pocket expenses include deductibles, co-payments and other amounts the participant must pay for covered benefits, but do not include premiums HSAs are similar to medical savings accounts (MSAs). However, MSA eligibility has been restricted to employees of small businesses and the self-employed while HSAs are open to everyone with a high deductible health insurance plan.

Contributions to the HSA by an employer are not included in the individual’s taxable income. Contributions by an individual are tax deductible. Individuals, their employers, or both can contribute tax-deductible funds each year up to the amount of the policy’s annual deductible, subject to a cap of $2,700 for individuals and $5,450 for families. Individuals aged 55-64 can make additional contributions.

The interest and investment earnings generated by the account are also not taxable while in the HSA. Amounts distributed are not taxable as long as they are used to pay for qualified medical expenses. Amounts distributed which are not used to pay for qualified medical expenses will be taxable, plus an additional 10% tax will be applied in order to prevent the use of the HSA for nonmedical purposes. Like MSAs, HSA are portable. In addition, individuals over age 55 can make extra contributions to their accounts and still enjoy the same tax advantages.

By 2009, an additional $1,000 can be added to the HSA.

Long-Term Care Insurance Contracts

Under the law, you can exclude from gross income amounts received under a long-term care insurance contract for long-term care services. You can also exclude employer-provided coverage under a long-term care insurance contract. Self-employed taxpayers can take long-term care insurance premiums into account in calculating their health insurance deduction. Unreimbursed long-term care services and long-term care insurance premiums are treated as deductible medical expenses subject to current limitations.

Life Insurance Paid before Death of Insured. Certain payments received under a life insurance contract on behalf of a terminally or chronically ill individual (an accelerated death benefit) can be excluded from your income.

Personal and Dependent Exemptions.

There are two types of exemptions:
Personal exemptions for taxpayer and spouse
Dependency exemptions for dependents

Personal and dependent exemptions reduce your taxable income. For 2006, each exemption equals $3,300. You may claim an exemption for yourself, provided you cannot be claimed as a dependent on another taxpayer’s return, for your spouse if you file a joint return, or if you do not file a joint return, provided your spouse has no gross income and is not the dependent of another, and for each dependent child whose gross income is less than $3,300, or for your child, notwithstanding his or her gross income, provided the child is either a full-time student under the age of 24 at the end of the year, or not yet 19 years old at the end of the year.

you have a child who is married, you may consider the option of taking a dependent exemption for such child if he or she so qualifies as just discussed and have the child file as “married filing separately.” In some cases, the benefit of claiming a dependent exemption may outweigh the benefit of having the child file a joint return with his or her spouse. We recommend that you take the time to figure out the tax using each method in order to determine which way provides the lower overall tax. Personal exemptions are phased out for taxpayers with AGI in excess of certain threshold amounts. For 2006, the exemption phase-out starts when AGI exceeds $150,550 for singles, $225,750 for joint filers, $188,150 for heads of household, and $112,875 for married couples filing separately.

Married Filing Separately

If you are married and you file a separate return, keep in mind that you must be consistent in claiming the standard deduction or itemized deductions. In other words, if your spouse itemizes deductions, then you also must itemize and cannot claim the standard deduction, even if your total itemized deductions are actually less than the standard deduction available to married persons filing separately.

Limit on Itemized Deductions

Beginning in 1991, Congress placed an additional “overall” limitation on the deductibility of a certain group of itemized deductions. In 2006, this limitation applies only if your adjusted gross income is greater than $150,500 ($75,250 if married filing separately). Itemized deductions that are subject to this limitation include taxes, home mortgage interest, charitable contributions, and miscellaneous itemized deductions. The total of this group of deductions must be reduced by 3% of the amount of your adjusted gross income in excess of $150,500 ($75,250 if married filing separately). This limitation is applied after you have used any other limitations that exist in the law, such as the adjusted gross income limitation for charitable contributions and the mortgage interest expense limitations. Keep in mind that medical expenses, casualty and theft losses, investment interest expense, and gambling losses are not subject to this rule. The Economic Growth and Tax Relief Act of 2001 gradually eliminates this limitation beginning 2006. The limitation is:

Reduced by one-third for 2006-2007 (i.e. itemized deductions will be reduced by 2% of the excess of AGI over the threshold amount)
Reduced by two-thirds for 2008-2009 (i.e., itemized deductions will be reduced by 1% of the excess of AGI over the threshold amount)
Repealed for 2010

Business and Travel Entertainment

The total amount of most miscellaneous itemized deductions claimed on Schedule A of Form 1040 must be reduced by 2% of your adjusted gross income. In other words, you can claim the amount of expenses that is more than 2% of your adjusted gross income. Generally, only 50% of the amount spent for business meals (including meals away from home overnight on business) and entertainment will be deductible. This limit must be applied before arriving at the amount subject to the 2% floor.

Charitable Contributions

 In order to claim a deduction for a charitable contribution of $250 or more made to a qualified organization you are required to obtain a contemporaneous written acknowledgment of your donation from such organization. Contemporaneous for this purpose means that you must obtain the written acknowledgment on or before the earlier of: 

1.  the date on which your return is actually filed, or 
2.  the due date for the return, including extensions. 

A cancelled check will no longer constitute adequate substantiation for a cash contribution of the amount. The written acknowledgment will have to state the amount of cash and a description (but not the value) of any property other than cash contributed. It must also state whether or not the charitable organization provided any goods or services in consideration for the contribution and, if so, a description and good faith estimate of the value of goods or services provided. If the goods or services provided as consideration for the contribution consist solely of intangible religious benefits, a statement to that effect will have to be included in the written acknowledgment. 

Keep in mind that the primary responsibility lies with you, not the charitable organization, to request and maintain in your records the required documents for substantiation purposes.

Gross Income

One of the most important decisions you have to make in determining your correct taxable income is what payments to include. Keep in mind that a taxable payment is not limited to cash.  It may be property, stock, or other assets. Also, you must include in your gross income the fair market value of payments in kind. For example, if your employer provides you with a car that is used for both business and personal purposes, then the value of the personal use of the car is included in your earnings and is taxable to you. Or, assume you assist a group of investors in purchasing a piece of real estate. In consideration for your services, the investors award you an unconditional percentage of ownership in the acquired asset, and you have not invested any of your personal funds. The fair market value of your ownership interest is considered as wages taxable to you in the year of transfer. 

Interest and Dividends

Interest that you receive on bank accounts, on loans that you have made to others, or from other sources is taxable. However, interest you receive on obligations of a state or one of its political subdivisions, the District of Columbia, or a United States possession or one of its political divisions, is usually tax-exempt for federal tax purposes. Generally, the interest rates paid on tax-exempt state and local obligations are lower than those paid on taxable bonds. However, keep in mind that you may find these lower rates attractive when you compare them with the after-tax yield from other taxable instruments. For example, if you are in the 33% tax bracket, you would need a 9% yield on a taxable bond to match a municipal bond with a 6.0% tax-exempt yield. The 2003 tax laws have changed the treatment of dividends. They are taxed at the same lower rate as capital gains, rather than as income.

How Capital Gains Are Taxed

Generally, the maximum capital gains rate is now 15% (5% for individuals in the 10% or 15% bracket).   These capital gains rates apply to individuals, estates and trusts.  A capital asset need only be held "more than 12 months" in order to have the lowest capital gain rate apply.   The current law has a sunset provision, so the rates may increase after 2008. This will also impact dividends, which may again be taxed as income.

Limitations on the Deductibility of Travel and Entertainment Expenses

Keep in mind that there are limits on the deductibility of certain expenditures for travel, business meals, entertainment activities, and entertainment facilities. For example, there is a 50% deduction limitation for business-related meals, entertainment, and entertainment facilities. In addition, there are special record-keeping requirements imposed on taxpayers claiming deductions for these items. Special rules also apply to deductions for cars and other property used for transportation, foreign travel, and attendance at foreign locations. 

Vehicle Expenses

If you began using a car, van, pickup, or panel truck for business purposes, you may be able to deduct the expenses you incur in operating the vehicle. You generally can use either the actual expense method or the standard rate method to figure your expenses. If you deduct actual expenses, you must keep records of the cost of operating the vehicle, such as car insurance, interest, taxes, licenses, maintenance, repairs, depreciation, gas and oil. If you lease a vehicle, you must also keep records of these costs. 

To avoid the burden of figuring actual expenses and of keeping adequate records, you may be able to use the standard mileage rate to figure the deductible cost of operating your vehicle.  Keep in mind that you can use the standard mileage rate only for a vehicle that you own. For 2006, the standard mileage rate is 44.5 cents a mile for all business miles. These amounts are adjusted periodically for inflation. If you want to use this standard mileage rate, you must choose to use it in the first year you place the vehicle in service for business purposes. Then, in later years, you can choose to continue using the standard mileage rate, or you may switch to the actual expense method. Other standard mileage rates are 15 cents a mile for moving and 14 cents a mile for services to a charitable organisation.

Club Dues

Dues paid for membership in professional organizations, such as the AICPA (the American Institute of Certified Public Accountants), AIA (the American Institute of Architects), or the ABA (American Bar Association), or public service organizations, such as the Rotary or Kiwanis clubs, may be deductible if paid for business reasons and the organization's principal purpose is not the conduct of entertainment activities. No deduction is allowed for club dues or assessments paid for membership if the club is organized for business, pleasure, recreation, or social purposes. These clubs include any organization whose principal purpose is the entertainment of its members or guests. The character of an organization is determined by its purposes and activities, not by its name. For example, dues and fees paid to athletic clubs, sporting clubs, country clubs, airline clubs, and hotel clubs are not deductible.  Keep in mind that specific business expenses, such as meals and entertainment that occur at a club, are deductible to the extent that they otherwise satisfy certain deductibility standards. 


Travel and entertainment expenses that are an ordinary and necessary part of your business may not be deducted, unless you meet specific substantiation requirements. The tax law specifically disallows an otherwise allowable deduction for any expense for traveling, entertainment, gifts or listed property, unless these expenses are substantiated either through "adequate records" or "sufficient evidence corroborating the taxpayer's own statement." Maintaining "adequate records" is clearly the preferable approach. This rule also applies to deductions for entertainment facilities. 

You are required to maintain documentary evidence, such as a diary, log, statement of expense, account book, or similar business records, for (1) any lodging expenditure, and (2) any other expenditure of $25 or more .

Selling Your Home

An individual may exclude from income up to $250,000 of gain ($500,000 on a joint return in most situations) realized on the sale or exchange of a residence.  The individual must have owned and occupied the residence as a principal residence for an aggregate of at least two of the five years before the sale or exchange.  The exclusion may not be used more frequently than once every two years.  The required two years of ownership and use need not be continuous.  The test is met if the individual owned and used the property as a principal residence for a total of 730 days (365 days X 2) during the five-year period before the sale.  Short temporary absences for vacations or seasonal absences are counted as periods of use, even if the taxpayer rents out the property during those periods.   

Home Mortgage Interest

Acquisition indebtedness is debt incurred in acquiring, constructing, or substantially improving a qualified residence and secured by such residence.  Any such debt that is refinanced is treated as acquisition debt to the extent that it does not exceed the principal amount of acquisition debt immediately before refinancing.  Home equity indebtedness is all debt (other than acquisition debt) that is secured by a qualified residence to the extent it does not exceed the fair market value of the residence reduced by any acquisition indebtedness.  Interest on such debt is deductible even if the proceeds are used for personal expenditures.

Owning More Than Two Homes

If you own more than two homes, keep in mind that you may not deduct the interest on more than two of these homes as home mortgage interest during any one year. You must include your main residence as one of the homes. You may choose any one of your other homes as a qualified residence and may change this choice in a different tax year. However, you cannot choose to treat one home as a second residence for part of a year and another home as a second residence for the remainder of the year if both of these homes were owned by you during the entire year and neither was your main residence during that year. 


Points are certain charges sometimes paid by a borrower. They are also referred to as loan origination fees, maximum loan charges, loan discount, or discount points. If the payment of any of these charges is only for the use of money, it is interest. Because points are, in effect, interest paid in advance, generally you may not deduct the full amount for points in the year paid. Points that represent prepaid interest generally must be deducted over the life of the loan. However, you may be able to deduct the entire amount you pay as points in the year of payment if the loan is used to buy or improve your principal residence, is secured by that home, and certain other tests apply.

Deferring Gains and Accelerating Losses

Generally it is preferable to defer gains and accelerate losses for the simple reason that the later the taxes are paid, the longer you have the use of the money. In addition, when you recognize a gain or loss it can also affect the tax benefits of your itemized deductions and exemptions. That's because capital gains and losses are included in figuring your adjusted gross income. Therefore, your capital gains and losses affect the calculation of your itemized deductions and personal exemptions which are phased out after your income reaches a certain level. Miscellaneous itemized deductions are deductible only to the extent that they exceed 2% of your adjusted gross income. Medical expenses are deductible only to the extent that they exceed 7.5% of your adjusted gross income. Capital gains income therefore also has an impact on both of these calculations. Depending on your itemized deductions, the time at which you recognize a capital gain or loss can have a significant impact on your taxes. 

Worthless Securities

The deduction for a worthless security must be taken in the year in which it becomes worthless, even if it is sold for a nominal sum in the following year. If you do not learn that a security has become worthless until a later year, you should file an amended return for the year in which it became worthless. Since it may be difficult to determine exactly when a stock becomes worthless, the capital loss deduction should be claimed in the earliest year in which such a claim may be reasonably made. Keep in mind that you should keep any documents indicating the date on which the security becomes worthless. Examples of sufficient documentation are bankruptcy documents and financial statements. 

Vacant Rental Property

You may deduct expenses on your rental property during a period in which it is not being rented as long as it is actively being held out for rent. This rule applies to a period between rentals as well as to the period during which a property is being marketed as a rental property for the first time. The IRS can disallow these deductions if you are unable to show that you were actively seeking a profit and had a reasonable expectation of achieving one. However, the deduction cannot be disallowed merely because your property is difficult to rent. 


Individual Stocks

The Bond Markets

Gift Tax Basics

Other Investments

Mutual Funds

Diversity Portfolio

Risk/Reward Tradeoffs

Balancing Your Plan


Sale of Home

Capital Gains

Gift Tax Basics


IRA Alternatives

IRA Conversions

Retirement Basics

Retired – What Now?

Social Security

The Social Security program was signed into law in 1935 after the nation had endured more than a half-decade of the Great Depression. It was intended to provide a safety net of income for individuals too old or disabled to continue working.

Participation in the Social Security program is mandatory, with most wage earners contributing a percentage of their annual incomes to support the program. In return, participants, their spouses, and certain dependents are eligible for retirement, disability, and survivorship benefits.

Today, approximately 90% of people aged 65 and older receive a Social Security benefit check each month. For many, this benefit is their primary source of retirement income.

How Contributions are Made and Accounted For

Each year you work, you and your employer contribute to the Social Security program in equal amounts. In 2006, 6.2% will be withheld from your paycheck, with another 1.45% going to Medicare, for a total contribution of 7.65%. Your employer matches contributions with another 7.65% of your total earnings. After you reach an earnings cap of $94,200 (in 2006), no further Social Security contributions are deducted. However, there is no cap on earnings for Medicare contributions.

How Your Benefits Are Calculated

Your benefits are based on a calculation that includes how many years you worked and how much you earned. These figures are used to determine the number of quarterly credits you accumulated toward benefits. If you were born prior to 1938, you may collect full Social Security benefits when you turn 65, or you may collect 80% of your benefit if you retire at 62. For people born after 1938, Normal Retirement Age (NRA), or the age at which you can receive full benefits, gradually increases from age 65 to age 67. To determine your NRA, visit When you die, your surviving spouse is entitled to your benefits, unless he or she would collect more based on their own earnings history.

Your Social Security account opens once you receive a Social Security card. However, it is not activated until you begin earning income. Once your earnings begin, the amount you contribute each year is recorded.

The accuracy of this record is important. You can obtain a copy of your earnings record from the Social Security Administration by filling out and mailing Form 7004. Forms are available at your local Social Security office or by calling 800-772-1213 or online at If you discover errors in your record, you can ask that it be corrected, though you must supply evidence of such errors. The Social Security Administration encourages people to check their earnings records every three years or so, because the earlier a problem is found, the easier it is to correct.

How Your Benefits Are Taxed

Once you begin receiving retirement benefits, you may have to include them as part of your taxable income reported to the IRS each year.

If your total income for the year, including half of your Social Security and your tax-exempt earnings, is greater than $32,000 ($25,000 for single taxpayers), you will owe federal income tax on a portion of your Social Security benefits. The IRS provides a worksheet to help you determine how much you must include in your taxable income each year. Did you know that...

The Social Security Administration paid benefits to more than 50 million people in 2003

Social Security benefits were awarded to more than 4 million people

Social Security provided at least half the income for 66% of the aged

Women accounted for 57% of adult Social Security beneficiaries

The average age of disabled-worker beneficiaries was 51

Disability and blindness were the reasons for paying 82% of Supplemental Security Income recipients