BROOKWOOD TAX SERVICE

End the Hassle - Hire a Tax Pro!

404-915-6268

Is Your Income "Too High" to Qualify for Most Tax Breaks?
Some Options for Folks in the the High Tax Brackets

Many of the tax breaks broadly available to America taxpayers have income limits that make them unavailable to many taxpayers who would consider themselves part of the middle class.

For a married couple, here are several tax breaks that are cut off above specific levels of adjusted gross income on a married filing jointly return:

There are some tax-advantaged options available, however, to help pay for college or put more money away for retirement.

Perhaps the best college-savings tax break for the high-income family is the 529 plan, which has no income limits.  A couple can contribute up to $55,000 (which counts for five years' worth of contributions) at one time to a 529 plan.  There is no current income tax on earnings within a 529 plan and, if the proceeds are tax-free when withdrawn if used to pay qualifying college tuition and fees.  The tax benefits are substantial over several years, particularly for a couple in the 28%, 33% or 35% tax brackets.

Don't overlook your company retirement plan as a source of funds for college.  Many employers allow participants to borrow from their 401(k)s (up to half the balance or $50,000, whichever is less).  You would pay the college loan money back to yourself (over up to five years), with interest, rather than to a commercial lender, restoring your funds before retirement.

So you've already maxed out your 401(k) at work and want to save more for retirement?  2003 retirement plan contribution limits are $12,000, or $14,000 for workers age 50 or older.  You might look into a variable annuity which allows your investment to grow tax-deferred until you need to withdraw the money.  Your contributions will come back out of the annuity tax-free, while all earnings will be taxed as ordinary income.

Many tax planners now advise taxpayers to consider long-term investments outside of a vehicle such as annuity, now that the tax rate on long-term capital gains has been slashed by the 2003 tax cut.  Stocks or tax-managed stock mutual funds may deliver more after-tax cash over the long term since gains and qualified stock dividends are taxed at 15%, while annuity earnings when paid out are taxed at the recipient's top marginal tax rate (up to 35%).

Some higher-income taxpayers might also look at universal life insurance policies as part of their retirement or college savings plan.  A variable universal life policy can be structured for a ten or 15-year premium pay-in schedule, with premium payments subsequently paid out of future policy earnings.  After the pay-in period, say when a child starts college, the policyowner can begin withdrawing funds that will be tax-free up to the amount of premiums paid.  Additional withdrawals can also be tax-free if taken as policy loans.  Consult a qualified life insurance professional if considering a variable universal life policy.

Taxpayers who own their own businesses can consider hiring their children, perhaps over the summer, to shift some family income to the child's tax bracket, which may be only half or even a third of the parents'.  Even if the parent cannot contribute to an IRA because of income level, the child probably can put up to $3,000 into a Roth IRA.  The contributions could later be withdrawn with no tax, and used for college expenses.  If your child is going to private secondary school, have the child use some of the summer job earnings to help pay next year's tuition, and take a tax deduction for your business to boot.

[Home]  [Site Map]  [Contact Us]

brookwoodtax@mindspring.com
Copyright © 2003 Brookwood Tax Service