Looking to lower your tax burden? As April 18th approaches, here are 10 strategies you may want to consider before you file.
The good news for tax filers this year is that no sweeping tax law changes took place last year. However, taxpayers may see some sweeping changes between now and next year, as President Trump has signaled that tax reform is one of his priorities in 2017.
This year, the estate tax will stay at a maximum of 40% and has an exemption of $5.49 million in 2017. In addition, the annual exclusion from gift taxes remains at $14,000 per donee for 2017.
That said, the IRS did adjust federal income tax brackets and increased some tax exemptions, deductions and credits. With that in mind, here are 10 tax strategies to consider this year.
1. Max out retirement plans. It may make sense to fully fund your employer-sponsored retirement plan such as a 401(k), since contributions can 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 this is a tax-deferred account, you generally do not pay income taxes on any earnings on your investments until you withdraw funds.
2. Make an IRA Contribution for 2016. Another way to maximize your retirement savings is to make annual contributions to an IRA. The deadline to make an IRA contribution for 2016 is April 18, 2017, so there is still time to make a contribution to a Traditional IRA which may be tax deductible or to a Roth IRA for potential tax-free income, subject to IRS eligibility requirements (including any applicable age or income restrictions). The maximum contribution is the lesser of (a) your taxable compensation for 2016, or (b) $5,500 (or $6,500 if you are age 50 or older) for 2016. These limits apply to all your IRAs combined.
3. 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 the year of conversion distribution (or deemed distribution), except to the extent the amount converted is treated as a return of your after-tax contributions, if any.
Subject to certain requirements, 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. A Roth IRA conversion may not be suitable 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.
4. Review highly appreciated assets. The capital gains rates for most taxpayers are still significantly less than ordinary income tax rates. 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.
5. 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.
6. 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.)
7. 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.
8. 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.
9. Review dividend distributions of your current portfolio. Qualified dividend tax rates are still lower than ordinary income tax rates for most taxpayers, so consider whether you should adjust your investment holdings to achieve greater income tax efficiency.
10. 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 review your current estate plan and insure it reflects your goals and objectives.
These strategies might help minimize the impact of current tax laws on your portfolio.
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.
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Diversification does not assure a profit or protect against loss
in declining financial markets.
Companies paying dividends can reduce or cut payouts at any
Bonds are affected by a number of risks, including fluctuations
in interest rates, credit risk and prepayment risk. In general, as prevailing
interest rates rise, income securities prices will fall. Bonds face credit risk
if a decline in an issuer’s credit rating, or creditworthiness, causes a bond’s
price to decline. Finally, bonds can be subject to prepayment
risk. When interest rates fall, an issuer may choose to borrow money at a lower
interest rate, while paying off its previously issued bonds. As a consequence,
underlying bonds will lose the interest payments from the investment and will
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than when the initial investment was made. NOTE: High-yield bonds are subject
to additional risks, such as increased risk of default and greater volatility,
because of the lower credit quality of the issues.
Interest on municipal bonds is generally exempt from federal
income tax; however, some bonds may be subject to the alternative minimum tax
(AMT). Typically, state tax-exemption applies if securities are issued within
one’s state of residence and, if applicable, local tax-exemption applies if
securities are issued within one’s city of residence. The tax-exempt status of
municipal securities may be changed by legislative process, which could affect
their value and marketability.
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underlying investments are available. Please read the prospectus carefully
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retirement purposes and may be subject to market fluctuations, investment risk
and possible loss of principal. All guarantees are based on the claims-paying
ability of the issuing insurance company. Taxable distributions (and certain
deemed distributions) are subject to ordinary income tax and, if taken prior to
age 59½, may be subject to a 10% federal income tax penalty. Early surrender
charges may also apply. Withdrawals will reduce the death benefit and cash
If you are investing in a variable annuity through a
tax-advantage retirement plan such as an IRA, you will get no additional tax
advantage from the variable annuity. Under these circumstances, you should only
consider buying a variable annuity because of its other features, such as
lifetime income payments and death benefit protection.
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