YOUR HOME
Home mortgage interest and property taxes are deductible. Home mortgage interest includes interest on any loan (up to a maximum of $1 million) to acquire, build or improve your home (or a second home), and interest on home-equity loans (where available) up to $100,000.
Up to $250,000 of profit on the sale of your home is not taxed if you're single ($500,000 for couples) and you meet certain ownership and use requirements.
When you die, the increased value of your home is not subject to income tax. Your heirs' basis in your home is its fair market value at your death. So given the right circumstances, you may forever avoid income tax on the appreciation in the value of your home.
EMPLOYEE RETIREMENT PLANS
Next to your home, participation in a retirement plan offered by your employer is your best tax-cutting strategy. Since your account is pooled with other employees' accounts, you receive the benefit of professional investment advisors and the better rates of return available to larger blocks of investors. You aren’t taxed on the earnings in your retirement account until you begin withdrawing the funds.
KEOGHS AND DEDUCTIBLE IRAs
You may be able to reap tax savings if your tax rate during your working years is significantly higher than your tax rate when you retire. For example, a self-employed person who makes tax-deductible contributions to a Keogh during the years when she is in the 35% tax bracket, then withdraws the money at retirement when she's in the 15% tax bracket will have saved significant tax dollars.
TAX-FREE MUNICIPALS
The interest on municipal bonds is generally tax-free. When considering investment alternatives, calculate whether tax-free municipals will give higher yields than similar taxable investments. For example, if you're in the 28% tax bracket, a tax-free yield of 5% is equivalent to a taxable yield of 6.85%.
COLLEGE FUNDING
If you need to fund college educations for your children, you can shift assets to your children and have the income taxed in their low brackets as long as their unearned income stays under the amount that triggers the "kiddie tax" ($1,700 for 2007).
If your income is not too high to disqualify you, consider buying Series EE savings bonds to pay for college expenses. The interest on these bonds is tax-free.
Also consider education IRAs, a ROTH IRA, or a regular IRA to build college savings. Amounts withdrawn from IRAs for college expenses qualify for favorable tax treatment.
RENTAL REAL ESTATE
Rental real estate still offers good tax shelter opportunities if you're willing to actively manage the property. You can write off up to $25,000 in losses against your other income if your adjusted gross income is under $100,000. This deduction phases out for taxpayers with income between $100,000 to $150,000. Special rules apply if you are a real estate professional, so get details.
