To save taxes this year, your first interest is to take advantage of every deduction and credit the Tax Code allows--a job for you and your tax guide or your tax preparer. Your second interest is to think now, today, about how you might profitably cut your tax bill the next time around. Some planning suggestions, for taxpayers in all brackets:
(1) See what your corporation has to offer. A lot of big companies, for example, maintain thrift plans. For every dollar an employe saves, the company might add 50 cents to his account. Your own contribution is not tax-deductible. But if it generates a 50-cent donation from your employer, that's better for most people than a tax deduction. All the money in the plan accumulates tax-deferred.
Some companies also offer tax-deferred compensation plans or payroll-deduction Individual Retirement Accounts.
(2) If you own your own business, there's good news coming. You used to have to incorporate to get a big tax-favored pension plan, and those of you who are incorporated know what a cost and a nuisance that can be. But starting in 1984, an unincorporated small-business person will be able to salt away just as much money in a tax-deductible Keogh plan as he could in a corporate pension plan. Next year's new Keoghs will be the simplest and least costly way for a small-business person to save money and save taxes at the same time.
(3) Give, or lend, some of your savings to your children. If you have a certificate of deposit in your own name, the interest will be taxed in your tax bracket. But if that same certificate is in your child's name it will be taxed to him. If the child has little or no income, the interest on that certificate will pass tax-free. Even if the child has a modest income, his or her tax bracket will be lower than yours.
You can give the money directly to the child. Or, using the Uniform Gifts to Minors Act, you can give the money to a custodian for the child. Another idea is to give the child a no-interest loan. The child puts the money in something safe like a savings certificate and the interest is taxed in the child's low bracket. Eventually, the child can use those accumulated interest earnings to pay for college or get started in life. Whenever you want, you can ask for the original capital back. But do ask a tax lawyer to draw up the note for the no-interest loan, to be sure you get all the tax technicalities right.
People with more assets might consider a 10-year trust, which shifts assets to your child for 10 years or more, then returns the original principal to you.
Income-shifting works best if you start when the child is young, so the interest will have more time to accumulate tax-free. But you can save taxes even by granting a no-interest loan for just one year.
(4) Start an Individual Retirement Account. An individual with earnings can put away a few hundred dollars or as much as $2,000 a year and deduct the money from his income. If he has a non-earning spouse, he can save up to $2,250 tax-deferred. A working couple can save up to $4,000. You can start an IRA right up to the due date of this year's tax return (April 15, or later if you get a filing extension) and still deduct the contribution against last year's earnings. This will reduce your 1982 taxes.
Some people are afraid of starting an IRA because of the 10 percent tax penalty that's assessed on money withdrawn before age 59 1/2 (except in the case of death or disability). But a better attitude toward the penalty is "so what?" If you earn high interest on your IRA and keep it for at least six to eight years or so, you'll probably break even on early withdrawals despite the penalty.
The odds are that you will not have the kind of emergency that requires breaking into your retirement account. It's better to start an IRA and risk breaking it than not to start an IRA at all.
(5) If you have your own business, give your child a job, deduct it as a business expense and let the child's savings start to build in his own low (or zero) bracket. A recent court decision upheld salary paid to a child as young as seven. I wouldn't count on every court's reaching such a liberal decision, but if the job is real, a tax deduction should be allowed.