Year-end tax planning should include income and estate tax planning

Nov
21
2013






By Joe Betcher

The end of the year means income tax planning. The goal when planning should be to keep as much of your income as possible, but many people overlook or are unaware of options that could save them money. Estate tax planning is one avenue that provides a variety of possibilities for individuals and businesses.

While there are several options depending upon the financial situation of the person or business, here are just a few that could help lower the amount of money given to the government.

There are two types of IRAs. One is a traditional and the other is a Roth IRA. A traditional IRA allows a person to save money, and the government taxes the money when it’s withdrawn. Money in a Roth IRA, on the other hand, gets taxed in the beginning rather than at the end. The initial amount in a Roth IRA may not be as large as if it were put into a traditional IRA, but individuals saving money in a Roth IRA do not pay taxes on the growth. For estate planning purposes, a Roth IRA, unlike traditional IRAs, does not require individuals to take distributions during their lifetime, but instead allows a person to keep increasing the balance tax-free for heirs.

Charitable giving also provides an outlet for estate planning. Capital gains taxes often plague investors, but charitable giving could prevent the investor from having to pay the taxes. Additionally, the donor is not expected to pay the capital gains taxes either. This becomes a win-win for all parties. Not only does the donation reduce the donor’s estate, it also reduces the donor’s taxable income.

One estate planning vehicle that many people overlook because of misperceptions is life insurance. Obviously, the main purpose of life insurance is to financially protect families and businesses after the loss of a loved one, but it can also be used to pay estate taxes and grow income tax free.

There are life insurance policies for all income levels. People often purchase term because it is more affordable than universal or whole life policies. If a term policy is purchased, it should have a convertible option that, upon its expiration, allows the policy to be converted to a whole life policy.

Whole life policies can allow people to save money without having to pay taxes. Some argue that the growth on the money through the years may not be as exponential as it could be in a different form of investing, but this is not always the case. A whole life policy reaps a constant return and has a significant dual purpose.

Estate planning can be overwhelming and the laws change constantly. Working with a financial advisor to create a tailored plan can give peace of mind, because the money is being managed in a way that provides the maximum benefit without having to keep informed of changing regulations.