Lower Your Applicable Tax Rate

Strategies for lowering the rate at which income is taxed include the rationalization of taxable income between tax years in light of marginal tax rates, moving income to persons or entities that are taxed at lower levels, moving income into accounts that are nontaxable or tax deferred, and conducting transactions in a manner that qualifies for lower rates (such as long-term vs. short-term capital gain rates).

Allocate Income Among Years.

A key feature of our federal tax system is its progressive nature. Tax rates are higher at higher levels of income. Your marginal tax rate is the rate of tax you pay on your next dollar of taxable income. The rates for 2010 and 2011 start at zero, then go to 10, 15, 25, 28, 33 and 35 percent. You can lower your tax bills by knowing your marginal tax rates and allocating income in a way that minimizes the income subject to higher tax rates.

Go for Long-Term Gains Treatment.

Investments held for less than one year are taxed at ordinary income tax rates, which are higher than capital gains rates. Investments held for more than a year are taxed at long-term capital gain rates, which are lower at all income levels.

Make Charitable Contributions with Appreciated Assets Instead of Cash.

Doing so will save you from owing tax on the capital gain, and you will still be able to deduct the full, appreciated value of the stock (if you have held the investment more than a year).

Gift Money, Assets or Investments to Entities That Enjoy Lower Tax Rates.

Any person can give $13,000 in cash or property per year to any person or persons, with no income tax or gift consequence to either party. This tax code provision is most often used to move assets to children and grandchildren because the amount transferred will not be subject to estate and/or generation-skipping tax. It is an effective tool for moving income-generating assets to persons who enjoy lower tax rates. As long as the gift is $13,000 or under, there is no reporting requirement. Additionally, one spouse may give $26,000 as long as the amount is reported and both spouses consent on their tax return.

Shift Income to Entities Domiciled in Cities, States or Countries with Lower Overall Tax Rates.

City, county, state and federal taxes vary significantly. Businesses that have multiple locations of operation and/or a non-local client base, and even individuals, should consider how taxes could be reduced if income could be attributed to another locale.

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