Talking Taxes

By David Chazin

Historically, many people don’t think about taxes until they’re facing the April 15 deadline. In fact, you’re probably thinking about your taxes right now. While you can maximize your deductions, it’s really too late to do any productive planning – but you can plan ahead for 2010.

The Basics
One of the best ways to save on income taxes is to max out your contributions to your ESIP. You can shift up to $16,500 into the Chevron 401(k) and if you are over age 50, you can make an additional “catch-up” contribution of $5,500. Plus, Chevron makes contributions of its own into employees’ 401(k) accounts.

Another popular way is to invest in traditional or Roth IRA’s (individual retirement accounts). Traditional IRA’s, like your 401(k), allow you to put away pre-tax dollars to grow tax-deferred until you withdraw money from your account, at which time you pay any applicable taxes. Roth IRA’s on the other hand, allow for tax-free growth on post-tax dollars and withdrawals are not subject to taxes. 2010 is unique in that you can convert your IRA (or even an old 401(k) account) to a Roth IRA regardless of your income (ordinarily there are income restrictions).

But this is just the beginning. At the end of every year, you should review the “nuts-and-bolts” things that can impact taxes, such as estimated tax payments, the sale of a residence, and distributions from other retirement accounts. In addition, reviewing your estate plan before the end of the year may help reveal some additional tax-reduction strategies appropriate to your situation.

For example, gifting can be a sound tax-savings strategy. Instead of giving cash to a charity, consider gifting appreciated assets (such as Chevron stock or real estate). You don’t have to pay any tax on the gain—and neither does the charity. So you get the deduction for the gift subject to certain limitations, and you circumvent the capital gains tax.

The “Stealth” Tax
Perhaps the biggest tax issue going on right now is the Alternative Minimum Tax (AMT). The AMT, originally designed to prevent the super-wealthy from avoiding a tax bill, has begun to hit a growing number of Chevron employees because the tax was never indexed for inflation.

Under the so-called “stealth” tax, you lose parts of certain deductions—medical expenses; interest on second mortgages; state and local taxes; and charitable gifts, among them—once your adjusted gross income reaches a certain level.

One of the things you can do that may help avoid the AMT is to exercise your Chevron stock options wisely, if you have any. There are two types of stock options: incentive stock options (ISOs) and nonqualified stock options, with the tax implication being the biggest difference between them. While nonqualified stock options are taxed as ordinary income when they are exercised (then if you exercise and hold the stock for a year, you can pay 15% capital gains tax on the appreciation), When ISOs are exercise, the difference between the price you pay and Chevron stocks’ value is subject to AMT.

The highest federal income tax rate is 35%; the highest AMT is 28%. In tax preparation, your income is run through both calculations and you pay whichever one is higher. (So if your federal tax is $90,000 and the AMT is $100,000, you pay $90,000 federal tax and $10,000 for AMT.) To be strategic about taxes, try to balance your ordinary federal income tax with your AMT tax amount so you can possibly avoid incurring AMT penalties.

The Future
For those of you with children, 529 college savings plans are a popular tool for allowing your future college funds to grow without paying taxes. They are an especially terrific college funding planning tool for families who can front-load up to five years’ worth of contributions per child. Under a special election, a 529 account owner can choose to front-load up to $60,000 per child, or $120,000 for married couples, into the college savings plan.

Keep in mind that current tax-relief provisions are scheduled to expire at the end of 2010: the estate tax and capital gains rates. So if you think these new tax breaks will go away and sunset as scheduled, you may want to take advantage of the tax breaks while you still have them. And let’s face it, the government has made unprecedented financial commitments the last few years – does anybody really think tax breaks will be increased?

We’d be happy to sit down with you to review what tax savings strategies, if any, you are currently employing and explore ways to proactively minimize your taxes for 2010 and beyond. We can also answer any financial questions you have, and discuss an overall strategy for your retirement and investments.

Because we work with multiple Chevron employees and retirees, we're very knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces).

Please contact us at (925) 659-0217 with specific questions or to schedule a time to meet in our San Ramon, Point Richmond or Houston, TX offices. Also, follow us on LinkedIn.


David Chazin, Insight Wealth Strategies and Lincoln Financial Advisors Corp are not affiliated with Chevron.