Dreaded Tax Season: How can YOU protect yourself?

It’s that time of year… TAX SEASON!! Oh yes, many of us know this stress. That dreaded feeling of filling, if you are going to owe the IRS, (Internal Revenue Service), or not? Every few years there seems to be changes right?

Trying to file yourself, can be like fighting Mike Tyson that just delivered that final T.K.O. or Total Knock Out. What happens if you make a mistake and or end up owing the IRS? How do you pay for that? There are other options to file, like going to H&R. Block, or a CPA, (Certified Public Accountant), and have them prepare your taxes. Especially, if you own a home and you don’t want the headache of doing them yourself?

A typical CPA can charge $40 to $400 per hour to prepare and file your tax return. YIKES! Now that hard earned income you just made, is going towards keeping the IRS off your back? What if there was another source you could pull funding from, in the event you have it to pay the IRS or your tax accountant, then just the cash you saved for a rainy day? What if there are investments you can make that would safeguard your assets in the event you owe or get audited by the “TAXMAN” and have to pay?

Let’s look at a few different options to help you reduce your tax liabilities and protect and grow your assets.

Strategies

If you are like me, (worrying if you will even get a refund), you try to find ways to deduct or make claims on your IRS 1098 form, like your mortgage interest payments, contributions like kids clothing, or writing off paid student loan interests. You realize, even with all of your deductions, or even with the tax breaks or child daycare credits, you may still owe. So what can you do?

We are left to look for variable solutions that protect our loved ones and our assets from market inflation and higher taxation. Here are a few investments you can look into that may help decrease taxable income:

Traditional or Roth IRA’s

Traditional IRA’s are a type of Individual Retirement Accounts that offer retirement savings with tax advantages. When you open an IRA, you can choose to invest in a variety of financial products, including stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Another type of IRA is called a Roth IRA. Roth IRA’s can be a good way to reduce future taxable income. One of the benefits of a Roth IRA, is that the money you invest in grows tax-free, so no need to report investment earnings, (the money your money makes), when you file your taxes. It is more beneficial to invest in a Roth Ira, if your Income increases by the time you retire. IRA’s are a great addition to your retirement portfolio. To learn more about IRA’s go on https://www.investopedia.com/terms/i/ira.asp.

Municipal Bonds

Municipal Bonds, (or muni bonds for short), are bonds issued by local governments that are used to fund projects like improving roads or building schools. When you invest in a mutual bond, the benefit to you is that you earn a guaranteed rate of return in the form of interest payments from the bond. Even better, these interest payments are exempt from federal taxes, and state taxes in the state that they are issued . A tax exemption may also apply to any state or local taxes on interest earnings. Doesn’t that sound nice?

Municipal bonds do carry certain risks, however, inflation for instance, can affect the interest rate and your subsequent rate of return. And interest from some municipal bonds are subject to the AMT, (Alternative Minimum Tax). I would recommend talking to a financial advisor to learn more about these types of bonds, as they may not be right for everyone.

LIfe Insurance and Annuities

You may not think of Life Insurance as an investment, but your policy could yield some tax benefits in your portfolio. Typically, life insurance benefits are tax-free when they go to the policy’s beneficiaries. A permanent life insurance policy that accumulates cash value, like an Indexed Universal Life (IUL), allows that cash value to earn interest over time. Retirement accounts don’t allow you to withdraw from them, unless you are pushing 60. With an IUL, tax-free loans can be taken out at any age without penalty—all while offering a death benefit . You can use the funds to even pay off that IRS debt too! If you’re looking for a relatively risk-free way to earn tax-exempt gains, an IUL policy could be right up your alley!

An annuity is another insurance product that allows you to protect and grow your assets in a tax deferred account. Annuities can provide a stream of income for you in retirement that you can’t outlive, and your gains can grow from year to year, without being lost to taxes. Annuities also can be set up to include an inflation adjustment, an especially important advantage with inflation currently at record highs.

Finish Line
With multiple financial planning options available, you can find ways to save and come up with a good strategy to outsmart the “TAXMAN”, or at least protect your assets and build a great retirement portfolio for you and your loved ones, so you can have peace of mind.