Effective vs Efficient Tax Deductions

Matt

Administrator
Staff member
I was just going over some estate planning matters, and found that some definitions used there were quite pertinent for people far from thinking of such things.

There are two concepts noted:

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The example cited to explain when you have an efficient, but not effective transfer of wealth was to consider a 100% donation to charity. It would efficiently eliminate taxes due, but it would not meet goals of wealth transfer to heirs etc.

I was just chatting over in the Effective Tax rate thread, and the common question of 'how do I reduce taxes without retirement accounts popped up'. This is what most younger people think of, especially when earning in the higher brackets. Efficiently, they could pay into retirement accounts, but effectively, because retirement seems so far away it seems like a flawed approach.

My advice tends to be to try to help people reframe retirement savings, with lines of thinking such as partial rollovers that can be triggered during a sabbatical, or when launching a small business, or going back to college (sudden drop in tax tier events) and furthermore we shouldn't forget the 72(t) rules which allow for early distribution from retirement plans (to be used cautiously).

I think most people who are at least in their late 30s will wish they had put more into retirement accounts sooner, and most in their 20's think its a pipe dream... so, is it better to help realign thinking, or just let them learn from their own mistakes?
 

credipig

Level 2 Member
One thing I plan to do is take advantage of the $2500 education credit when my daughter starts college next year. I plan to convert $10K in traditional IRAs to offset.
 

Matt

Administrator
Staff member
One thing I plan to do is take advantage of the $2500 education credit when my daughter starts college next year. I plan to convert $10K in traditional IRAs to offset.
I'm not sure why you are converting - is it to raise your taxable base? If so, I believe that $1000 of the $2500 is refundable...
 

credipig

Level 2 Member
Yes, my taxable income will be much lower, so I want to use the IRA conversion to produce enough taxable income to put me over $2500 taxes owed. Then the $2500 credit will put me back to about zero. I want to take advantage of the entire credit.
 

Matt

Administrator
Staff member
Yes, my taxable income will be much lower, so I want to use the IRA conversion to produce enough taxable income to put me over $2500 taxes owed. Then the $2500 credit will put me back to about zero. I want to take advantage of the entire credit.
Cool - note the refundable $1K aspect then. That means you can txf in less, and the credit can put you $1K into the positive.
 

credipig

Level 2 Member
Oh, I see. So you're saying if my taxes due are $1500, I can use the $2500 tax credit and receive $1000 back from the government. Thanks, I didn't realize that. I'll definitely use that strategy.
 

Matt

Administrator
Staff member
Oh, I see. So you're saying if my taxes due are $1500, I can use the $2500 tax credit and receive $1000 back from the government. Thanks, I didn't realize that. I'll definitely use that strategy.
Should be the case - but double check so I can claim no accountability for it screwing things up for you totally, I am too pretty to be sued and sent to prison :)
 
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