| An eNews Update to our Quarterly Newsletter |
March 2007
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1. Contribute as much as possible to your employer retirement plan The number one way to reduce individual income taxes is to reduce your income and one of the best ways to reduce your income is to contribute money to a 401(k), 403(b), or a similar retirement plan at work. Your contribution reduces your wages, and lowers your tax bill.
Contributions and earnings in a 401(k) plan are not subject to federal and most state income taxes until the funds are withdrawn. A 401(k) plan allows you to save money on a pretax basis, and most employers will contribute matching funds which makes the 401(k) plan even more attractive. 2. Open a Traditional IRA Traditional IRAs offer two distinct advantages in terms of taxes: potential deductibility of contributions and current tax deferral on investment earnings. In addition, you can open an IRA or make contributions to an existing IRA as late as the deadline for filing a tax return for that year. That means you have until April 15, 2007, to make your 2006 IRA contribution. Taxpayers who are not participants in an employer-sponsored retirement plan can deduct their IRA contributions up to the specified limit. Taxpayers who participate in employer sponsored retirement plans may not be able to deduct all of their contributions to a Traditional IRA depending on their income. You will need to check with your tax advisor on deductibility limits.
For the tax years 2006 & 2007, the maximum that you can contribute to an IRA is $4,000. If you are over the age of 50, you can contribute a total of $5,000. 3. Charitable Giving The federal government encourages gifts to educational institutions and other nonprofit organizations. A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions. There are limits to how much you can deduct, but they are very high. For example, if you contribute to a public charity, you would be able to deduct 50% of your contribution. There are different ceiling amounts for different types of charities so please check with your tax advisor. Individuals age 70½ or older are required to take out a certain amount of money from their IRAs and other qualified retirement plans. This is referred to as the Required Minimum Distribution (RMD). In 2007, individuals can have their distribution sent directly to a charity. This kind of distribution, (up to $100,000), is federal income tax-free and can be used to satisfy the RMD. 4. Reduce PA state income tax by contributing to 529 plans If you have children, you’re probably thinking about college costs. 529 plans are state-operated investment plans designed to help families save for college. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and qualified distributions to pay for the beneficiary's college costs come out federal income tax-free. Pennsylvania taxpayers can now take state income-tax deductions on contributions of up to $12,000 a year to 529 plans offered anywhere in the country. In other words, you do not have to use the Pennsylvania 529 plan to take advantage of the deduction.
This article is for informational purposes
only and not intended as financial advice. Consult your financial
advisor to determine what is appropriate for your situation. If you have any comments, questions or suggestions concerning this
electronic newsletter, please email us at fgi@fragassogroup.com.
Visit Our Web site: A REGISTERED INVESTMENT ADVISOR ©2007 The Fragasso Group, Inc., All Rights Reserved
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