Pay Yourself or Pay Uncle Sam: The Choice May Be Yours!

With tax season looming perhaps you are preparing to stroke that dreaded check to the IRS for taxes owed and wondering how to avoid doing so? Note I said avoid and not evade – big difference! Avoiding taxes means simply taking advantage of all opportunities available to minimize your tax bill, evading taxes means illegally misrepresenting your taxes owed and could land you in hot water with Uncle Sam.

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A simple way to reduce taxes owed each year is to contribute to a 401(k), 403(b), or 457 retirement plan depending on the type of employment you have. For 2008 you may contribute, by salary deferral, up to $15,500 and if you are age 50 or older you may defer an additional $5,000. Each dollar you contribute to your retirement plan avoids current taxation so your deferral will reduce your taxable income accordingly. To illustrate, if you are less than 50 years old earning $60,000, by deferring the maximum $15,500 into your retirement plan you would only pay taxes on $44,500.

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Another reason to increase your deferral is to take advantage of any matched savings your employer may offer. A typical match is fifty cents on the dollar, up to a specified limit. In other words, you contribute a dollar and your employer matches it with fifty cents- an immediate 50% return on your investment! Don’t leave that gift on the table!

Although many of our tax reduction strategies for 2007 expired as the ball dropped in Times Square on December 31st, you may still have one option available to you- funding an Individual Retirement Account (IRA). Eligibility to fund an IRA, and take a tax deduction for the contribution, depends on a number of factors including your marital status, income, and participation in an employer sponsored plan such as a 401(k). If you qualify you may fund your IRA, maximum $4,000 or $5,000 if you are 50 or older, up until tax filing deadline of April 15th of this year. Need help determining your eligibility?

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There are many online resources or, for a little light reading, check out IRS Publication 590 to learn more.


Securities and Investment Advisory Services offered through American General Securities Incorporated (AGSI) Member FINRA/ SIPC, Member American International Group, Inc. GFG, LLC is a separate entity from any member of AIG. AGSI does not offer tax or legal advice.

Carol E. Arnott, Registered Representative, Investment Advisor Representative

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