slides: Seven Ways To Reduce Your Oregon Income Taxes
Saturday, November 29, 2014
Who pays the maximum tax burden? It’s a single filer with a taxable income greater than $125,000 and a couple with taxable income greater than $250,000.
See Slides Below: Seven Ways to Reduce Your Oregon Income Tax
The tax obviously costs them and lower earners a big piece of change. Yet the situation need not be as bleak as it may seem, partly because there are ways to mitigate the price tag. Below you’ll see seven steps that can be taken to cut the tax burden.
In addition, much of the pain is offset by the fact that Oregon, unlike, say, its neighbor Washington, has no sales tax. By comparison, Washington’s average state and local sales tax rate is 8.8 percent, fourth-highest in the country. And, counter-intuitively, a study by the Institute on Taxation and Economic Policy shows that “high rate” income tax states are economically outperforming no-tax states.
One reason is that the tax revenue, after all, is earmarked to improve state infrastructure, including public schools, and that boosts the economy. America’s nine high rate states saw more economic growth per capita last decade than the nine states that have no income tax at all. And declines in median family income last decade, slammed by two recessions, were considerably smaller in high rate states than in states with no income taxes.
Oregon wound up enjoying big growth in per capita Real State Product (RSP) at 25.6 percent – compared to the 50-state average of 8.1 percent.
But none of this offsets the fact that sky-high state income taxes are painful. Almost nobody wants to pay more taxes than absolutely necessary. So here are seven tips to consider to cut your tax burden.
Andrew Murdoch is president of Portland-based Somerset Wealth Strategies and a Certified Financial Planner. He holds several security and insurance licenses.
Related Slideshow: Seven Ways To Reduce Your Oregon Income Taxes
Focus on tax deferral, by maximizing, for example, your investment in a tax-deferred 401(k) plan at your company. For instance, if you’re part of a couple in which the husband makes $100,000 yearly and the wife $70,000, each should contribute $16,500 to their 401(k), the maximum allowable by law. True, this cuts their pay from $170,000 to $137,000. The difference is tax-deferred, however, and you may well be a in a lower tax bracket when it comes time to withdraw the money.
Take advantage of tax-deferred products, such as municipal bonds, a cash value life insurance policy and annuities. There is no tax on the interest paid by an Oregon-based government bond. Cash value life insurance provides you with continuous lifetime coverage as long as you pay the necessary premiums. Premiums for this insurance are initially higher than they would be for the same amount of term insurance, but the extra payments accumulate tax-deferred. Most annuities also offer the option to defer taxable withdrawals.
Taking from your IRA
If you are a senior turning 70 and don’t immediately need the money you would get from taking the mandated RMD (Required Minimum Distribution)from your IRA, purchase a Qualified Longevity Annuity Contract. This allows you to defer 25 percent of the total of all your IRAs, or $125,000, whichever is less, until age 85. For example, if you have a $500,000 IRA, you could defer $125,000 and then calculate your taxable RMD on $375,000 instead of $500,000.
Don't Work Over Time
If you have the option, think twice about working overtime at time-and-a-half. The pay appears to be a great deal, but after taxes it is not. Every extra hour worked is taxed at the worker’s highest marginal tax rate. Sometimes, overtime work may even push the worker into a higher tax bracket. You don’t have to be a big earner to be hurt. If your normal annual income is $40,000 a year, for example, and you get paid $240 extra for working eight hours of overtime, you only get to take home a little bit than half of your $240 gross pay.
Claim Itemized Deduction
Go out of your way to claim itemized deductions. For example, you can use these deductions to offset part of the cost of charitable contributions, mortgage interest payments on your home, and state and local income and property tax payments. If you itemize your federal taxes, some of your state taxes are offset by lower federal taxes.
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