The case of the seven million missing American children is a story of how tax planning shouldn’t be done. In this episode, I cover that story and share ways we should be tax planning. You may be surprised at the order in which this planning should be done. Listen to learn more about that, and at the end of the episode, I’ll share a general tip about tax planning.In this episode...
- A sad story of “missing” children [01:10]
- Legal strategies to reduce tax liability [03:03]
- Why HSAs are important in retirement [05:51]
- IRA contributions [07:43]
- A proactive tax approach [09:45]
One spring day in the late 1980s, over seven million American children went “missing.” The day was April 15th, the deadline for Americans to file taxes. The year was 1987, and it was the first year the IRS required tax filers to include the Social Security number (SSN) for any claimed dependents. In 1986, when taxpayers only had to provide the children’s names, 77 million dependents were listed on tax returns. But, in 1987, when SSNs were required, only 70 million dependents were listed.
Taxpayers in 1986 received an exemption of $1,900 per claimed dependent. That’s $1,900 for each child that would be subtracted from any taxes owed. However, when the new requirements were implemented, 7 million children “disappeared,” resulting in an extra $2.8 billion in additional taxes paid to the treasury.Looking at the past, present, and future
Claiming imaginary children isn’t the best idea for saving on taxes and is unwise. However, there are legal strategies to reduce lifetime tax liability in 2022 and beyond. One of the aspects I focus on with clients is tax mitigation. Paying less in taxes requires a proactive approach. All tax mitigation strategies should be verified with a tax professional and a certified financial planner. Why both? Because tax professionals often only look at the past, financial planners will also look at the present and future.
These strategies assume that there isn’t high-interest consumer debt, like credit cards, that needs to be paid off first, and an emergency fund has been established. The first priority to mitigate taxes is participating in a company 401k type retirement account. Company matches are always pre-tax, but they are low risk, and double your money to a certain percentage (subject to individual plan vesting and matching percentage guidelines). Another step to consider is contributing to a health-saving account. These accounts are the only ones that are triple tax-free.Taxes in traditional retirement accounts
We have to have a plan when it comes to taxes. Most Americans save for retirement in what are called traditional retirement accounts. We choose to be taxed during retirement when the funds are withdrawn from these accounts. Many people look at their 401k or IRA balances and believe that money is all theirs to spend. However, that money is partly the government’s. Since taxes are owed on these funds, how much is taken by the government will ultimately depend on planning. In the next episode, I’ll be going over what is often called the ticking tax time bomb and a strategy, called a Roth conversion, that could reduce your taxes.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.Resources & People Mentioned
- 7 Million Missing Children
- The IRS' Case of Missing Children - Los Angeles Times
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