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Insurance Policies That Lower Your Income Tax Obligations

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It’s April 15th and while many have already filed their tax returns, some are still scrambling to get their documents in on time.  Thus, it is an appropriate time of the year to talk about different ways to reduce your income taxes.

If you wish to reduce the amount of taxable income on your 1040 or are contemplating additional deductions, then you need to keep certain insurance policies in mind. There are several insurance and investment accounts that can lower your tax burden when setup properly.

Listed below are a few of the most common strategies and policies.

Annuity Investment Accounts Defer Income Taxes

If you are a fixed income investor primarily using certificates of deposit, then you might be creating unneeded taxable income. Whether or not you withdraw the interest, your CD’s are taxable investments – plain and simple.

If you don’t need income on a regular basis, then you should consider investing in a fixed or indexed annuity account.

Insurance Policies That Avoid TaxesAnnuities do not generate taxable income so long as you allow the interest to compound.  You can defer taxes in a non-qualified annuity for your entire lifetime if you wish.

If regular income is unneeded, you can determine how much and when you want to withdraw it.  Thus, you are in control of how much (if any) of your interest will be taxed.

It is also worth pointing out that fixed annuity accounts offer higher interest rates than most bank savings instruments.  Additionally, your deposits are insured up to a total of $300,000 in most states. And no, the insurance company does not keep your principal or interest upon death.  All accumulated funds are payable to your named beneficiaries at passing.

Life Insurance Proceeds Avoid Income & Inheritance Taxes

Life insurance may be the single best vehicle for tax avoidance. While these policies should not be sold as “investments” they certainly have all the attributes of a good one.  Whole life insurance and indexed life policies are very safe and pay reliable interest based on the fixed internal returns declared by the policy or the chosen market index.

Income Taxes</strong>Life insurance grows tax deferred like an annuity account.  If you do not withdraw the interest or gains, then no income taxes will be due – ever.  But unlike an annuity, life insurance proceeds pass income tax free to your beneficiaries.  That’s right, no income taxes are due whatsoever.

This is why single premium life insurance policies have become so popular. Rather than pay income taxes on the interest generated from your bank CD, you can easily purchase a life policy with the principal.  Most single premium life contracts require very little underwriting.

The single deposit would create an immediate death benefit much larger than a  CD or annuity account could ever promise and the cash value would grow each year. You would have access to the entire invested deposit (cash value) amount almost immediately if it was needed for an emergency or anything else.  And many policies offer an accelerated death benefit that can pay for long term care expenses.

Finally, in states like New Jersey and Pennsylvania, life insurance proceeds made payable to a named beneficiary are not subject to the state inheritance tax.  This is a significant advantage over almost all other accounts in states with this unique, additional tax.

Life policies offer guarantees, liquidity, long term care benefits, income tax avoidance and can avoid inheritance taxes as well.  Talk about a win win “investment” vehicle.

Write Off Your Health Savings Account Contributions

If you are in the market for health insurance and you are comfortable paying incidental expenses out of pocket, then a health saving account might be right for you.  A HSA is a separate account that you can contribute thousands of dollars to each year.  And the best part, all contributions can be written off as a tax deduction up to certain individual and family limits.

The funds grow tax deferred and can be withdrawn tax free for qualified medical expenses!  If you or your family is in need of additional deductions, then setup your health savings account and contribute the maximum amount each year.  And make certain that it’s used to pay for the many qualified expenses that the I.R.S. allows. You should become familiar with what qualifies as a medical expense at the I.R.S. website.

And once again like an annuity, all funds belong to you.  Should you later cancel your health insurance or switch to a different type of policy, then you can withdraw all accumulated funds from your HSA.  But remember, if the funds are not used to pay for medical expenses then they would once again be subject to income taxes.  No penalties would be due however.

Request More Tax Savings Information

In summary, these are three simple ways to reduce your tax liabilities each year. While one size does not fit all, the strategies can be beneficial for most.

It is always wise to talk with a knowledgeable agent about the “big picture” before purchasing a life insurance or annuity policy and to make sure that you understand any potential limitations of these products.

And you also want to make sure that you know exactly what to expect from your health insurance policy and health savings account as well.  A tax advisor should be included in the discussion.

Please contact us to learn more about tax avoidance strategies that can help you preserve more of your hard earned wealth.

Category: Annuities, Articles, Life Insurance, Wealth Transfer

Last updated on September 5th, 2017