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Get Ahead With Tax Planning Strategies for Next Year

By Posted on In Rule of Thumb, Taxes, Uncategorized

Are you hunting for last minute ideas and strategies to reduce your tax bill? If so, consider spending that time preparing to reduce your tax bill for next year. It will be a lot more productive to take steps now that could reduce the tax bill for 2016 than to trying to hunt for some donation receipt. Here are a few strategies to consider going forward:

Get a handle on your income tax brackets: If you convert a portion of your IRA into a Roth, or you periodically cash in savings bonds, or if you have a taxable investment account or you can control when you recognize income, it’s critical that you understand your income tax bracket thresholds and plan throughout the year. Recognizing income (through a conversion or sale) can bump you up into a higher tax bracket and you end up paying more in taxes. Sometimes that tax can be steep and costly, affecting your income taxes, your social security taxation, and even your Medicare premiums!

Tax Loss Harvesting: If you have a taxable account, you are well aware of how frustrating it is to own an investment with a huge unrealized gain and don’t want to sell it because of the tax it will generate. The solution is to sell it in coordination with one or several investments that have underperformed. The gain and loss can offset each other. 2015 was a particularly great year to do tax loss harvesting, but we won’t be that lucky in the future.

Gifting Strategies: If you’re charitably inclined, consider giving gifts of appreciated stock. You get a tax deduction AND avoid paying capital gains on the stock. If you’re over 70.5, you can make direct charitable contributions from your IRA which can offset your annual Required Minimum Distribution.

Important Changes to Social Security

By Posted on In Retirement, Taxes, Uncategorized

Big changes to Social Security usually take years to plan, develop and roll out. But not this time. Congress has suddenly shut down two popular claiming strategies that have been growing in popularity over the last few years. File & suspend and restricted application claiming strategies will disappear in the next 6 months.

I’m not surprised that these strategies have been cancelled. They exploited a loophole in Social Security and in some cases allowed retirees to collect more than the social security system could handle. What’s most surprising is how quickly these changes will occur. See the chart below to see how it affects you.

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Interested in learning more?

How to Reduce the Pain of a Required Minimum Distribution

By Posted on In Retirement, Rule of Thumb, Taxes, Uncategorized

When the government enacted legislation that allowed individuals to fund a Traditional IRA with tax-deferred income, those legislators also wanted to ensure that the taxes would eventually be paid. The concept was to defer income taxes until the time the money may be needed for retirement.

To ensure that the deferred taxes would eventually be paid back during the saver’s lifetime, a Required Minimum Distribution (RMD) of the balance commences when the individual turns 70 ½. The first year’s RMD is approximately 4% of the total of all tax-deferred IRA balances. Following that, the RMD percentage increases each year during retirement. The penalty for not withdrawing the RMD can result in a substantial penalty of 50% of the shortfall.

Below are a few strategies to consider that could help to reduce the pain of an RMD:

Plan Ahead

Individuals who will continue to accumulate substantial income from pensions and other sources can consider withdrawing portions of their IRA soon after age 59 ½, but only to the extent that the withdrawals do not force a higher tax bracket.

Defer Social Security

In some cases, deferring Social Security until 70 while using your IRA if needed up to that time can yield dual benefits. The RMD reduces while maximizing the Social Security benefits that increase each year that starting payments are deferred.

Conversion to Roth IRA

Converting portions of your existing traditional IRA into Roth IRAs before age 70.5 will allow the balance to continue to grow tax-free. Though taxes must be paid at the time of the conversion, subsequent withdrawals from the Roth IRA will be non-taxable.

Charitable Donations

Donating an amount equal to the RMD to qualified charities will offset the calculation of the taxable income.

Reinvesting into an Investment Account

One of the more popular strategies is to take the RMD, pay the taxes and reinvest the rest into a brokerage account.  Investors can keep their money working for them.

Contact us if you’re interested in discussing any of these strategies.

How ETFs Can Reduce Your Tax Bill

By Posted on In Taxes, Uncategorized

At the end of the year, many mutual fund companies distribute capital gains to shareholders. This causes a taxable event right at the end of the year and in some cases can be an unwelcome and costly surprise when it comes to tax time. Note: if you only have an IRA or Roth, you’re off the hook – this taxable event only applies to investors with individual, joint or trust accounts.

This year, we have seen some funds projecting capital gains that are as high as 11% of the value of the fund. If you had a $100,000 position in a fund that issued a capital gain of 10%, that would be a $10,000 capital gain. If taxed at 15%, you can expect to pay an extra $1500 in taxes.

In a lot of cases – this is unavoidable. Investors could face a much bigger tax bill if they sold out of the fund as they may have large capital gains as a result of holding the fund for many years. Either way, the investor is likely have to pay an unexpected tax.

That begs the question – how can investors build portfolios to minimize the pain of capital gains distributed by the fund company. One answer involves the use of passively managed Exchange Traded Funds (ETFs) which tend to be much more tax efficient than mutual funds.

ETF.com posted a good article that helps to explain why ETFs can help avoid the unpredictability of capital gain distributions.

View the article on ETF.com

Too late for this year, but contact us if you’re interested in how ETFs could help reduce your future tax bills.