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Tax Planning

What is Tax Planning?

Tax planning typically involves strategies to minimize your income tax liability. For instance, deferring income, maximizing deductions and selecting tax advantaged investments. Contrary to normal tax reduction planning, Total Wealth Planning has, in certain instances,increased taxable income for many of our clients. If you anticipate higher income tax rates or income in the future, then increasing certain types of taxable income in a current year may save significant taxes in future years. This could be accomplished by generating long term capital gains income, or possibly converting a traditional IRA to a Roth IRA.

You must look beyond just the tax preparation to maximize deductions. Proactive tax planning throughout the year is the key to reducing taxes and maximizing your after-tax dollars for wealth accumulation. This is accomplished by applying changing tax laws to your specific situation.

See below to learn more about Asset Location Strategy, Ordinary, Income, Capital Gains and Qualified Dividends, Tax-Exempt and Tax-Deferred Income.

Asset Location Strategy

Understanding which account to hold various asset classes in is important to effective tax planning. Depending on the type of investment, the asset class can produce income as defined by the IRS. It may be considered ordinary, capital gains and qualified dividends, and tax exempt income. We strive to place these asset classes into the accounts with the most favorable tax implications.

Ordinary Income

Investments often produce income that can be subject to different types of tax rates. Interest income from savings accounts, certificates of deposit, money market accounts, annuities, bonds, and some preferred stock, and certain dividends are subject to ordinary income tax rates. These are based on a taxpayer’s marginal bracket, which is typically much higher than long term capital gains rates.

Capital Gains and Qualified Dividends

Taxpayers in the 15% and 10% marginal brackets will continue to pay 0% on longterm capital gains and qualified dividends. Taxpayers in the 25%-35% marginal brackets will be subject to 15% tax on long term capital gains and qualified dividends. Those taxpayers in the highest 39.6% marginal bracket will be subject to a 20% tax on long term capital gains and qualified dividends. Keep in mind those taxpayers subject to the 20% tax rate will find their net investment income subject to the new 3.8% Medicare surtax.

Tax-Exempt Income

This is income that’s free from federal and/or state income tax, depending on the type of investment vehicle and the state of issue. Municipal bonds and U.S. securities are typical examples of investments that can generate tax-exempt income.

Tax-Deferred Income

Certain income whose taxation is postponed until some point in the future is referred to as tax-deferred income. For example, in a 401(k) retirement plan, 403b plan, or traditional IRA, earnings are reinvested and taxed only when withdrawals from the plan are made. The income earned in these types of plans is tax deferred.