Unification News for January 1995


t May Be Easier Than You Think To Minimize Your Tax Bill

Another tax season has come and gone. Are you still smarting from this year's tax bite? Is reducing the size of next year's tax bill one of your top priorities? Are you missing out on tax-saving opportunities? Check the following ideas with your tax advisor. Then determine which of them might be appropriate for your financial situation.

Retirement Program for the Self-Employed

An individual with self-employment income can establish a qualified retirement plan-in addition to a tax-favored IRA-and reduce taxable income in an amount equal to the contributions. At the same time, that individual can defer taxes on all income earned by plan assets. This means you can act today to reduce taxes for future years.

Deferred Annuity Contracts

Fixed and variable deferred annuity contracts are both outstanding vehicles for faster money growth, through the deferral of current income taxes. These contracts also offer the potential for guaranteed lifetime income. With a deferred annuity contract, you normally pay no federal, state or local income tax on the earnings until you decide to receive payments from your annuity. If distribution occurs during retirement, you may be in a lower tax bracket.

Tax-Exempt Investments

Investing in quality municipal bonds is a prudent way to earn high after-tax income while easing your current tax burden. Investing in "municipals" may provide additional tax benefits for investors residing in the state where particular municipal bonds are issued.

Deferring Income with Treasury Bills and CDs

If a large sale of stock or other property, a retirement distribution or unexpected income has placed you in a higher tax bracket this year than you will be in next year, you can realize tax savings by deferring receipt of additional investment income until next year-when you expect your tax bracket to be lower. This may be done by purchasing a Treasury bill or short-term CD (one year or less between issue date and maturity) that will mature after the conclusion of the tax year. At maturity, the income will be taxed at what could be a substantially lower tax rate.

Growth-Oriented Investments

Growth-oriented investments, such as common stocks, provide the bulk of their return in the form of appreciation rather than current income. Since little or not current income is generated, investing in such assets can be an effective method to save on current income taxes.

Gift Tax Exclusion

Although not deductible for income tax purposes, the $10,000 federal gift exclusion enables you to give away that amount in cash or property each year to as many individuals as you like, free of gift tax. In appropriate situations, the gift tax exclusion can be an effective tax-saving strategy.

Gifts to Minors While the annual gift tax exclusion applies to donees regardless of age, state laws known as the "Uniform Gifts to Minors Act" or the "Uniform Transfers to Minors Act" allow annual gifts to be made to a minor's account. The minor cannot legally demand control of these funds until the age of majority is reached, but because the gift is irrevocable, it still qualifies for the $10,000 annual gift tax exclusion.

Rollover of Qualified Plan Distributions

Under certain conditions, distributions from qualified retirement plans may be rolled over tax-free into an IRA. This permits the recipient to postpone taxation on the distribution until it is withdrawn. All appreciation and income earned on those funds continue to grow tax-deferred until withdrawn from the IRA. If the distribution is made payable directly to the recipient, the plan must withhold 20% of the taxable amount. However, if the plan distributes the asset directly to an IRA or other qualified plan, the distribution will escape withholding.

Corporate Retirement Plans

Many options are available to a corporation when selecting a retirement plan for its employees. Substantial tax-deductible contributions may be possible. Additionally, the plan's appreciation, interest, dividends and other income are not taxed to the plan's participants until distributed. Further, lump-sum distributions from corporate retirement plans may qualify for a special lower federal tax rate, and most distributions are eligible for tax-free rollover into an IRA.

Salary Reduction Plans

Many employers now offer salary reduction plans to their employees. These plans offer participants an opportunity to defer receipt of a portion of their salaries (up to a maximum of $9,240 in 1994) until a later year, which creates a number of tax benefits. First, since the deferred salary is not included in the employee's current income, it is not taxed until withdrawn, which will likely be after retirement. In addition, the income earned on the deferred salary is also not taxed until withdrawn.

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