Tax Planning Strategies for Maximizing Deductions and Investments

This assignment provides comprehensive tax planning advice for an individual, detailing income sources, deductions, and tax liabilities. It analyzes various income streams including salary, rental income, dividends, and spouse's income, along with deductions for superannuation, donations, insuranc...Read More

Income Under Head Salaries Amount in $ Amount in $
Salary 130000 130000
Income under head Rental Properties
Rental Income 6971
Less: Interest paid 7600
Depreciation 19571 (20199)
Other Income
Dividend 87845
Medical Compensation 8000
Spouse Income 64000 159845
LTCG
BHP 51462
MYR (27530) 23932
Total Income 269646
Less: Deductions
i) Contribution to 12000
Superannuation fund
ii) Donation 4200
iii) Insurance 3000
iv) Premium 1260
v) Interest paid 15000
vi) Spouse's Deduction 1200 36660

Taxable Income 232986
Tax Liability
Up to 18650 10% 1865
From 18651-75900 15% 8588
From 75901- 153100 25% 19300
Balance 28% 22368
Tax on LTCG 15% 3590 55710
Less: Tax Withheld 38376
Tax Credit on dividend 29400 67776
Refund 12066
From above, it is clear that client has credit available for its tax payments as Company has
already deducted withholding tax and dividend what he received is fully franked means
company has already paid tax on the amount of dividend distribution which a shareholder can
claim as credit while calculating its tax liability.
Further client has insurance policy, medi-claim, and donation to lower its tax liability. In this
case, where he is demanding of refund, he can lower down its donation amount.
Client has already made investment to lower down its tax liability.
Advice
The big tax breaks are found in the realm of business and real estate, but there are things you
can do as an employee that can help you take a bite out of your tax load. I’d like to share
some tax pointers for those who are holding down jobs and are employed. I’d call them tax
tips for the working stiff, which you can use to mitigate the tax hits that come your way:

1. Participate in your employer’s benefit plans for pre-tax treatment on the following:
 Commuter Benefits. I once held down a job in the city, and back then, I had to pay
for parking or mass transit on a regular basis. But by participating in a commuter pre-
tax program, I easily saved $1,000 a year on commuter fees.
 Group Life Insurance. Some employers offer life insurance plans and when they do,
the premiums can be pre-taxed.
 Group Long-Term Disability Insurance. This can be pre-taxed as well if this is
available to you as an employee, and I’ve actually seen group premiums that were
such a bargain that it would be a crime not to purchase the insurance.
 Use a Flexible Spending Plan. Consider contributions to a flexible spending
account. You will need to estimate how much you are going to spend because any
unused amount is not returned to you. This type of account can save you a mint. Note
however, that Obamacare threatens to cap your FSA contributions to $2,500 by
2013. Such a shame, really, since you could use this for daycare or certain medical
costs. In my neck of the woods, daycare is around $600 a month. That amounts to
over $7,000 a year, and without any caps, the resulting tax savings could be over
$2,000 a year. Nevertheless, you can still estimate how much your family spends for
health services, medications and prescriptions not covered by your health insurance,
and apply for a flexible spending account that can cover these expenses.
 Charitable Contribution Matching. There are employers that hold charity drives
with special provisions. If you decide to participate in an employer-sponsored charity
event, not only is your donation tax deductible or pre-taxed, but it may also qualify
for a matchable contribution from a magnanimous employer. I worked at a company
that actually organized charity programs that worked this way, and it was great to see
my donation go a long way, thanks to my employer’s matching funds.
2. Deduct eligible job-related expenses. Let’s go over a few:

 Educational & professional training expenses. You’ll need to review these
carefully, but there is a possibility that you’ll be able to deduct such expenses if you
don’t qualify for a tuition reimbursement program with your employer.
 Job-related travel expenses. You can claim tax deductions as an employee in certain
situations. For instance, if you deliver materials or items by using your own vehicle,
then you can consider deducting mileage, gas or toll fees which you incur on your
travels.
 Expenses relating to a job hunt. There may be some caveats to this deduction, so
check to see if your expenses are eligible.
 Unreimbursed employee expenses. To be deductible, these expenses need to be
ordinary and necessary, and incurred during the tax year. Some examples are: dues
you pay as a member of a professional society, home office use, license fees, legal
fees, etc.
These expenses are considered miscellaneous, so in order to be deductible, they’ll have to
comprise more than 2% of your adjusted gross income or AGI.
3. Don’t pass up the free money: contribute to a 401K Plan!
Yes you’ve heard this all before. But I am still stunned that some of my own friends who
can afford it, decide to deliberately ignore the 401K benefit. Why? Because retirement is
just “too far away”. A few other excuses I’ve heard: they won’t be in the U.S. by the time
they retire, they have “better use” for their money (like buying more stuff), they never
plan to retire, or their house is their retirement plan. Understandably, it may be tough for
some to find the money to save, but even small regular contributions make a difference in
a tax deferred plan. If you and your spouse are both working, you can contribute up to
$17,000 each (for 2012). If you are over 50, you can contribute up to an additional catch
up amount of $5,500 (limits are raised over time to reflect cost of living increases).
However, contribution limits can also be established by your employer so you’ll need to

check on their guidelines. Seems like you can contribute at most up to the limit set by the
government or by your employer, whichever is less. And if it’s available to you, there’s
nothing more enticing than free money with that employer match.
4. Build up your Roth IRA or Traditional IRA.
If you are 49 and under by the end of 2012, the maximum contribution limit to combined
IRA accounts is $5,000 or your taxable income for the year, whichever is smaller. If
you’re 50 years or older by the end of 2012, then the most you can contribute to your
combined IRA accounts is $6,000 or your taxable compensation, whichever is smaller.
5. Donate your unwanted stuff to the Salvation Army or Goodwill.
Don’t throw away your surplus, unwanted items; recycle them and give them to charity
for tax deductions! Again, I know people who don’t bother. They go the hard route by
planning garage sales, which in themselves can be overwhelming. These folks
procrastinate but eventually give up and rent a dumpster (to throw things away). But
why? The Salvation Army does pick ups after all. If they don’t pass by your
neighborhood, you can still drop off your stuff at donation collection hubs; it’s probably
still less effort than dealing with a dumpster. When you donate, don’t forget to pick up a
receipt for your tax records.
6. Open 529 accounts for your dependents.
A 529 savings plan account grows tax deferred just like a retirement account does so this
would be a great idea if you’re planning to pay for college anyway. For some plans, the
funds from a 529 account may be used towards internationally accredited schools, even if
your dependents no longer reside in the U.S. The tax-free gift limit is now up to $13,000
per giver so that you and your spouse can each give up to that amount to each account
without triggering the gift tax.
7. Good: Start a home business. Better: Get into real estate. Best: Get into a real estate
business.

Any book I pick up about tax management never fails to point out that real estate and
business are where you’ll be able to apply the best tax strategies. So that’s something to
consider. In fact, this is the year I am strongly considering entering the field of real
estate investing, given the massive corrections I’ve noted in certain regional property
markets.
There’s just no escaping the tax man, but you can definitely minimize those taxes that you
pay out. The breaks are out there but the challenge is to find them and to execute! Easier said
than done sometimes