While fixed annuities provide both safety and tax deferred interest accrual for hundreds of thousands of retirement savers, the annuity policy holders cannot enjoy tax savings forever. Eventually, all interest income that is dispersed from an annuity is taxed at the annuity owner's top marginal tax bracket--eventually.
However, there are 3 instances in which one can gain some tax savings when using distributions from annuities. The 1st scenario applies to small (or big) company owners who state an operational loss for the year on their tax returns. As long as the business is not regarded as a passive activity, the loss can be used to cancel out other types of income, such as investment income. For example, if a shopkeeper realizes an operating loss of $30,000 in a given yr, then she or he might take a $30,000 annuity distribution that exact same yr and credit the loss against the income, therefore effectively creating the annuity withdrawal tax-free. It is a great way to make use of an apparently awful loss for tax savings.
An additional great method to exempt your fixed annuity distribution from taxation would be to designate a charity as the beneficiary on the contract. Once you die, the charitable organization will then receive the proceeds of the annuity, without any income or income tax liability. This provides double tax savings-both income and estate. So if you want to leave somehting to charity, lave an asset like an annuity that would otherwise be beaten by taxes if left to your heirs.
A 3rd method to appreciate tax savings with your fixed annuity is to use the proceeds to pay for long-term care expenses. Medical expenses that exceed 7.5% of a taxpayer's adjusted gross income are fully deductible on schedule A of form 1040. The majority of long-term care expenses may easily exceed that quantity, frequently running in excess of $60,000 in a solitary year. Even by itself, that kind of cost will qualify a taxpayer to itemize, whether or not he or she could be able to do so otherwise. For example, a married couple filing jointly would have to have itemized deductions in excess of the regular deduction of $11,900 (2012) to be able to claim them. But a $60,000 long-term care bill will put most filers far over this threshold. If a couple hypothetically has an adjusted gross income of $40,000, then 7.5% of that is $3,000. Consequently, all long-term care expenses in excess of that $3,000, or $37,000 in our example, could be deductible on schedule A of the 1040. So if they took out a $40,000 fixed annuity distribution to pay the expenses, more than 90% of the income would be sheltered by theior medical deduction.
Although nobody looks forward to heavy medical cost, properly used, it could provide substantial tax savings.
You Pay More Taxes Than NecessaryAnd we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.
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