A Tax Planning Holiday Story

tax planning

Illinois residents Mary and Joseph have two children: Josh, age 10, and Jennifer, age 12. The parents set up 529 plans through the State of Illinois and contributed $5,000 for Jennifer and $3,000 for Josh. Their `ho ho ho’ is $400 in state taxes they did not have to pay to Illinois. Bill’s mom and Mary’s single sister, Hanna, wanted to do something for the children, as well, and so they added $3,000 to each of the children’s plans. They saved $150 each in Illinois state taxes.

Bill runs a small, profitable family business. As a corporation, he is in the 35 percent federal tax bracket, and he also pays the Illinois corporate rate of 9.5 percent.

Bill takes advantage of a provision that allows him an immediate deduction of up to $500,000 for qualified costs in 2011, which can include a vehicle, computer, desk, chairs or other equipment. Normally he would have to spread this deduction over a period of years as depreciation. Bill’s `ho ho ho’ is $277,500 in business tax savings this year.

Mary’s smart and successful sister Hanna runs a small S Corporation, selling cupcakes through Whole Foods. This has been a banner year, especially for the red velvet cakes. She will net $225,000 this year. In the past, she’s had a small 401(k) retirement plan for her employees, but she feels frustrated as she is getting older (45) and has saved little for her own retirement and now qualifies for the top tax bracket.

She visits her financial advisor and complains about her 401k plan. Due to the regulations of these plans, she can only contribute $6,000 for herself and $2,800 for each of her employees. She is frustrated in her efforts to lower her current tax bill and to save for retirement. Her advisor sets up a custom retirement plan designed just for her business. Hanna can now contribute $100,000 for herself and continue to contribute $2,800 for her young employees. Hanna will be able to defer over $40,000 in taxes this year. She figures she will be in a lower tax bracket when she retires, so she will probably never have to pay all those deferred taxes. She now feels in the `ho ho ho’ mood.

The whole family feels happy. Bill decides to celebrate and take the family on a trip to Hawaii for the holidays. Bill will use the tax-free air miles he earned from his tax deductable business trips.

Disclaimer: Tax laws are complex and subject to change. Stafford Wells Advisors does not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein. Information provided herein has been obtained from sources that are deemed to be reliable. Stafford Wells Advisors makes no guarantees, express or implied, as to the accuracy or completeness thereof. Past performance is not a guarantee of future performance. The material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument, or to participate in any trading strategy. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This material does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. This material may not be sold or redistributed without the prior written consent of Stafford Wells Advisors.

Susan Carr-Templeton

About Susan Carr-Templeton

Susan Templeton is the founder of Stafford Wells Advisors, a wealth management firm serving individuals, families and businesses and advising workplace retirement plans. Stafford Wells was founded in 2008 with the mission of delivering independent, complete, unbiased investment and planning advice, free of any conflicts of interest. Susan Templeton has more than 20 years experience in investment management. She received her B.S.B.A. degree in marketing from the University of Denver and her M.B.A. from the University of Chicago. Susan is a trustee for the Advocate Foundation where she chair’s the Planned Giving Committee and is a member of the Investment Committee. Susan serves on the investment committee for the Visiting Nurse Association (Chicago) and is a former trustee of the Village of Oak Brook Police Pension Plan.