The year-end tax planning season is less uncertain than it has been in recent years. Yet investors may need to be prepared for higher taxes. For 2014, higher income taxpayers may be subject to a 3.8% Net Investment Income Tax on their net investment income and an Additional Medicare Tax of 0.9% on compensation. The top effective tax rate is now 43.4% on dividends, interest and short-term capital gains, and 23.8% for qualified dividends and long-term capital gains. The estate tax (as well as the gift tax and generation skipping transfer tax), with a new slightly higher rate of 40%, has a new “permanent” exemption of $5 million (2011 dollar-indexed for inflation), which increased to $5.34 million for 2014 and $5.43 million in 2015. In addition, the annual exclusion from gift taxes will remain at $14,000 per donee for 2014. Given this, here are several tax strategies to consider as we move into 2015:
1. Max out retirement plans.
The primary advantage of participating in a Traditional IRA is that the contribution may be tax deductible; similarly, a contribution to a 401(k) plan may be made on a pretax basis. If your taxable income is lower, the amount of income tax you owe for that year might also be reduced. And because these are tax-deferred accounts, you do not pay income taxes on any earnings on your investments until you withdraw funds.
2. Consider a Roth IRA conversion.
While income limits may preclude some investors from contributing to a Roth IRA, anyone can do a Roth Conversion by converting eligible funds from a Traditional IRA or employer-sponsored retirement plan to a Roth IRA. Roth IRA contributions are made with after-tax dollars, and qualified distributions are federal income tax free.1 When you convert, you must pay taxes on the amount converted as ordinary income for that year, except to the extent the amount converted is treated as a return of your after-tax contributions, if any. In general, after-tax money in an employer-sponsored qualified retirement plan (e.g., 401(k)) may be directly converted to a Roth IRA tax-free. Taxpayers who have potentially taxable estates should consider the Roth IRA conversion option, as it could make a potentially significant future wealth transfer more tax efficient. Consult with your tax and/or legal advisor regarding your individual situation as a Roth IRA conversion may not be for everyone. A number of factors should be considered before converting, including (but not limited to) whether the cost of paying taxes today outweighs the benefit of income tax-free qualified distributions in the future.
3. Review highly appreciated assets.
The capital gains rates for most taxpayers are still significantly less than ordinary income tax rates. Consult your tax advisor about whether shifting to investments that generate capital gains instead of ordinary income would be a good strategy. Be sure to weigh the risks of having a large concentrated stock position or highly appreciated position. If gradual diversification is needed, trim before year-end to spread the capital gains impact over multiple years.
4. Give increased attention to buy-and-hold strategies.
With increased capital gains tax rates, buy-and-hold strategies may be attractive; the higher the tax rate, the more valuable the strategy. Similarly, it becomes more important to harvest tax losses to shelter gains that otherwise would be taxed at the higher rate.
5. Augment your tax-advantaged investments with municipal bonds
Municipal bonds, the interest on which is typically free from federal, state and local taxes, are one of the most efficient investments available for defending against current and potentially higher tax rates. Even though income tax rates rose for high-income taxpayers, interest income earned on municipal bonds remains largely unaffected. (Capital gains from the sale or exchange of municipal bonds typically is not tax free.)
6. Consider redeploying assets to a variable annuity.
In a rising tax environment, the tax-deferral feature of annuities becomes increasingly attractive. Diversifying your retirement portfolio with a variable annuity may provide tax-deferred growth potential, guaranteed lifetime income, increased retirement savings, equity upside potential and a death benefit for named beneficiaries. Remember, though: withdrawals from variable annuities will be taxed as ordinary income and, if made before age 59½, may be subject to a 10% early distribution penalty tax. Please consult your tax advisor about whether variable annuities are appropriate for you.
7. Consider professionally managed and tax-advantaged investment strategies.
Now is a good time to evaluate the overall tax efficiency of your investments. Beyond municipal bonds, consider tax-efficient mutual funds or separately managed accounts that aim to limit the number of taxable events within your portfolio.
8. Review dividend distributions of your current portfolio.
Qualified dividend tax rates are still lower than ordinary income tax rates for most taxpayers, so consult with your financial and tax advisors about whether you should adjust your investment holdings to achieve greater income tax efficiency.
9. Engage in legacy planning and gifting.
All investors should have an estate plan that reflects their wealth-transfer goals and objectives. Taxpayers with taxable or potentially taxable estates who are in an economic position to do so and would like to benefit their heirs should consider making lifetime gifts to those heirs now, which may be a potentially more tax-efficient wealth-transfer strategy. Also, consider making gifts under the annual gift tax exclusion and charitable gifts before year-end. Please consult your tax and legal advisors to review your current estate plan and insure it reflects your goals and objectives.
10. Consider a securities-based loan or line of credit for tax obligations
Using cash or liquidating assets could disrupt your investment strategy and trigger capital gains taxes or transaction fees. A securities-based loan or line of credit can be fast, easy to set up and may offer competitive rates with typically no fees while keeping your investment portfolio intact.2 These strategies might help minimize the impact of current tax laws on your portfolio. Contact a Financial Advisor or Private Wealth Advisor to determine which strategies might be appropriate for you.
1 Restrictions, tax penalties and taxes may apply. For a distribution to be an income-tax-free qualified distribution, it must be made (a) on or after you reach age 59 ½, due to death or qualifying disability, or for a qualified first-time homebuyer purchase, and (b) after the five tax year holding period, which begins on January 1 of the first year for which you made a regular contribution (or in which you made a conversion or rollover contribution) to any Roth IRA established for you as owner
2 In certain instances, clients may be charged legal or documentation fees by third parties. Clients may also be charged a fee for the issuance of a letter of credit.
Comentários