Readers continue to seek ways and means to lessen the impact of income taxes. Avoiding taxes through legal means is not only permissible but is wholly justified. The government does not expect you to pay more than is legally required.Tax evasion, however, is illegal and can land you in trouble. Several of the questions asked by readers:
Can putting assets, such as Treasury bill, into the names of children or parents with little or no income avoid taxes?
While this tactic is possible, complications could be troublesome. Putting a the Uniform Gifts to Minors provisions available in most states. Giving $10,000 to a child means that the money belongs irrevocably to the child.
Any gift from one person to another in excess of $3,000 a year must legally be reported to the IRS. Two parents can each give $3,000 for a total of $6,000 to one child. Expecting the minor child to give the money back plus interest is stretching credibility and is illegal unless gifts are reported and taxes paid.
Cal lending money interest free shelter income from taxes if a child, for example, is attending college?
Parents may loan several thousand dollars to a child on a demand (not a term or installment) note. The child then invests the money and receives the interest tax free if the child's total income does not exceed $1,000 for the year. Even if the child's income exceeds $1,000 and he or she files an income tax return, any tax paid will likely be less than if the same income was reported with the parents' income.
Overtime work or husband and wife both working may run family income into high brackets. What can be done to avoid high bracket taxes?
First, no more than 50 percen of earned income may be taken by federal income taxes. Higher brackets, up to 70 percent, apply to unearned income. Second, there are no magical means for sheltering income from taxes not already generally known. The most common are an Individual Retirement Account for up to 15 percent of gross income to a $1,500 limit when a worker is not covered by a pension or profit-sharing plan.
A Koegh Fund for self-employed persons is similar -- 15 percent but with an upper limit of $7,500. Depreciation from real estate, up-front expenses from oil-drilling and similar limited partnerships, and tax-deferred annuities delay or lessen tax impacts. Persons looking for ways ot cut taxes should recognize that the tax man will get at least one bite one way or another sometime -- now or eventually. Most tax planning involves keeping that one bite to a minimum.