While taxes may not be popular with everyone, they impact us all. We help you develop and manage a long-term strategy to address retirement, charitable giving, tax-loss harvesting and more.
When thinking about tax planning strategies, there are specific things to consider when planning for the future. Focusing on long-term tax planning strategies can have great impact for any family. Some of these strategies include retirement tax strategies, charitable tax strategies, tax-loss harvesting strategies and tax reduction strategies.
Retirement tax strategies
One of the most important and easiest tax planning strategies is implementing a solid retirement strategy. If you have earned income for the year, you should consider contributing to a 401(k) or traditional IRA, which will help reduce your taxable income for the year. Also, the money in these accounts can grow tax-deferred until you withdraw it in retirement. Besides the tax benefit you receive now, these contributions would be an important part of increasing your retirement savings.
Tax efficient retirement withdrawal strategies
Another retirement strategy to consider is contributing to a Roth 401(k) or Roth IRA. With these accounts, money is taxed before it is contributed to the account, but it can be withdrawn tax-free at retirement. The amount that you contribute to your retirement accounts during your working years and the types of accounts you contribute to will impact how much you pay in taxes both now and in retirement.
Charitable tax strategies
Another tax planning strategy to focus on is tax-effective charitable giving. This includes gifting appreciated securities to avoid capital gains. By gifting appreciated securities you avoid the capital gains that you would incur if you sold the shares. Also, if you are 72 or older, you can gift IRA assets. You are eligible to transfer up to $100,000 per year directly to a charity tax-free because this amount is not included in your adjusted gross income. The charitable distributions will also count toward the required minimum distributions that you must make each year when you reach the age of 70 ½ or 72, depending on your date of birth. Lastly, a Donor Advised Fund is a giving account that allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time.
Tax-loss harvesting strategies
To have an effective annual tax planning strategy you should also consider tax-loss harvesting. This strategy can help investors minimize any taxes owed on capital gains or regular income. It can also improve overall investment returns. As a strategy, tax-loss harvesting involves selling an investment that has lost value, replacing it with a reasonably similar investment, and then using the investment sold at a loss to offset any realized gains.
Tax reduction strategies
Tax planning strategies start with understanding your tax bracket, which will help you understand the tax reduction strategies that would be best for your unique situation. For example, municipal bonds may seem like a perfect investment, because it is income that is not subject to taxes. However, depending on your tax bracket, taxable bonds that pay a higher interest rate may make more sense for you on an after-tax basis vs tax-free municipal bonds. Knowing your tax bracket will also help you understand taxes owed on capital gains, ordinary dividends and qualified dividends.
If you have questions about your specific situation, please do not hesitate to contact your advisor.