What’s Left After Taxes Grows

Financial women know that taxes greatly affect wealth accumulation. No matter how well you invest your money, a 33% chunk out of your investment returns or your income is painful. Yes, income taxes can be boring, and that is why everyone needs a good CPA. There are actually people who enjoy preparing tax returns!

Worth magazine produced an article on the top 10 tax deductions. While you are probably too busy to do #5 on the list, which is to establish a captive insurance company, I’m sure you have time to send the article to your CPA and set up a meeting to discuss it with her.

I am certainly not against giving, but I favor giving to the causes that you choose. The amount you do pay in taxes can support other causes that you have not chosen. Two of the deductions suggested actually support and encourage giving. For those of you who are big shoppers, consider #9, which is to consider a sales tax deduction. While it is too cumbersome to keep track of receipts for small items, if you have made a large purchase, this one could be worthwhile.

Here are a few of my favorites on the list that are simple:

#1 Fully Deduct Advisory Fees

It’s fairly common knowledge that tax and investment advisory fees are tax deductible.

But many tax payers miss out because they claim financial advisory fees as miscellaneous itemized deductions on Schedule A. “You have to be careful—these deductions phase out,” says Jim Bruyette, a CPA and wealth manager at Harris SBSB in McLean, Va. “If you paid an accountant $2,000 and claimed it on Schedule A, it’s possible you wouldn’t get any of the deduction.” Instead, he says, consider using the deduction against income from sole proprietorships, rental properties or partnerships, which is reported on Schedule C or Schedule E. “Every penny could be used to offset income this way,” he says.

#3 Invest in Natural Gas Drilling

Uncle Sam has slammed the door on most tax shelters, but one goodie remains: The ability to deduct 80 percent or more of your investment in a drilling operation for natural gas.

“This is not a shenanigan. It’s incentive for people to invest in oil and gas production,” says Andrew Pincus, managing member of Regal Capital Management in Coral Springs, Fla. Investors pool money to fund drilling in tested wells, and then receive royalties on production. While royalties can come in for 20 to 30 years, the risk is that the wells run dry early.

#6 Squeeze Maximum Charitable Giving Benefits

If you’re charitably inclined, consider using a charitable remainder trust.

If you fund a trust with appreciated assets, you get an upfront tax deduction, avoid the capital gains on the assets and reduce the value of your taxable estate. You then get paid income from the trust for a specified period. Funds left in the trust at the end of the period go to the charity you specify. It’s a win-win for charities and taxpayers, Kirkland says.

#8 Go for Green Improvements

If you’re charitably inclined, consider using a charitable remainder trust.

If you fund a trust with appreciated assets, you get an upfront tax deduction, avoid the capital gains on the assets and reduce the value of your taxable estate. You then get paid income from the trust for a specified period. Funds left in the trust at the end of the period go to the charity you specify. It’s a win-win for charities and taxpayers, Kirkland says.

09        Consider a Sales Tax Deduction

The choice is yours: On your federal tax return you can either deduct your state and local taxes or the amount you paid in state and local sales taxes.

While most people deduct state and local taxes because they amount to more than sales taxes, if you live in a low- or no-income tax state—or if you’ve racked up big expenses on yachts, supplies for home renovations and furnishings—run the math to see which deduction would benefit you most.

10         Donate Appreciated Assets

Why give away cash when you can give away stocks, fine art or other appreciated assets?

As long as you have held the asset for at least 12months, you get a deduction for the full value of the donation, even if its value is many times what you originally paid for it. If you give $100,000 in stock and your cost basis is $10,000, you will get the full $100,000 deduction and “bypass the capital gains,” Jim Bruyette says. If you like the stock, “buy it again the next day.”

It’s only mid July, so you have a lot of time left to make a difference for the 2010 tax year. Send your CPA an email today. Next April, you’ll be glad that you did.