Tax Guide: More Tips for High-Income Individuals

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Chapter 3
More Tips
for High-Income Individuals
Tax Strategies for 1998

Make sure your
estimated tax
payments cover trust income
as well.

Change your residence. Moving to another state may save not only income tax, but also other taxes (such as estate, property, and sales taxes). The states that do not have an income tax are Alaska, Nevada, South Dakota, Texas, Washington, and Wyoming. Bear in mind, however, that low income tax rates may be counter-balanced by high estate taxes or personal property taxes.

Withdraw IRA funds for 60 days. Rather than borrow short-term funds from a third party, consider using your IRA funds for up to 60 days. To avoid tax, you must follow proper procedures. Consult with an expert before withdrawing funds.

Important!

We've posted our updated tax planning guide. Click here for planning tips and strategies for 1999 and beyond.

Avoid ancillary probate in another state. Real estate and tangible personal property owned by a deceased individual but located in another state are subject to probate proceedings in that state. To avoid having to have more than one probate, consider transferring any out-of-state property, such as real estate, into a revocable living trust.

Maximize contributions to retirement plans. Verify that you are con-tributing the maximum amount possible to employer-sponsored retirement plans and to any plans that have been established for self-employment income.

Weigh the effectiveness of a defective grantor trust. This type of trust is effective for estate-planning purposes. It is only "defective" for income tax purposes, which means that you, the person establishing the trust, will continue to pay the tax on the income earned by the trust. Although the value of the trust is increased by the amount of the tax paid, this payment is currently not treated as an additional taxable gift to the trust.

Verify that estimated income taxes cover trust income that may be taxable to you. Have you established any trusts for the benefit of your family, with the income still taxable to you (that is, established a defective grantor trust)? Alternatively, have you established any trusts that provide you with certain rights that cause you to pay tax on all or a portion of the trust's income? If so, make sure your 1997 income tax projections include this income for purposes of paying the correct amount of estimated income tax.

Have you made unplanned substantial improvements to your principal residence within two years from the date you purchased it? If you made substantial improvements that you did not consider when you paid any tax on any capital gain that you could not roll into your current principal residence, you may be able to file for an income tax refund.

Consider renting to college-age children. Most college expenses have continued to rise annually at a faster pace than the consumer price index. Rather than renting a place for your child to live while he or she is attending college, consider purchasing property that you could rent to your child.

Weigh ordinary income taxation on retirement-plan distributions against capital gain rates on other investments. In some cases, it may be more advantageous for individuals approaching retirement to invest in equities outside of their retirement accounts so they can obtain the favorable capital gains rate when they "cash in" their investment. Retirement plan distributions are generally taxed at ordinary income tax rates, which can be in excess of 39.6%.

Consider limitations in deducting mortgage interest on primary and secondary residences. For residential mortgages dated after October 14, 1987, you can't deduct all of the interest if the total indebtedness exceeds $1.1 million ($100,000 on any new indebtedness -- such as a home-equity loan -- that was not used to acquire, construct, or substantially improve a personal residence). If interest is attributable to debt that is greater than the these dollar limits, it is not deductible.

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