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estate taxes in new york

Strategies to Minimize Estate Taxes in New York

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Navigating the complexities of estate planning can be overwhelming, especially when it comes to tax implications. In New York, estates valued above a certain threshold are subject to estate tax, which can significantly impact your loved ones’ inheritance. This article identifies strategies to help you maximize your estate while keeping it below the tax limit.

From leveraging lifetime gifting to utilizing trusts, there are various options available to minimize your tax burden and ensure the smooth transfer of your assets to your heirs.

Understanding estate taxes in New York

Estate taxes in New York can be complex and challenging to navigate, especially for those who are unfamiliar with the intricacies of estate planning. As a resident of the Empire State, it’s crucial to have a solid understanding of how estate taxes work and how they can impact your financial goals.
The estate tax is a tax levied on the transfer of your assets upon your death. In New York, the estate tax is administered at the state level, in addition to the federal estate tax. This means that your estate may be subject to both state and federal estate taxes, depending on the value of your assets.

The current estate tax limit in New York

As of 2024, the estate tax exemption in New York is $6.94 million. This means that if the total value of your estate is less than $6.94 million, your estate will not be subject to the New York estate tax. However, if the value of your estate exceeds this threshold, your estate will be subject to a tax rate that can range from 3.06% to 16%.

It’s important to note that the estate tax exemption in New York is different from the federal estate tax exemption. The federal estate tax exemption is currently set at $13.61 million for individuals and $27.22 million for married couples. This means that if your estate is valued below the federal exemption, it will not be subject to the federal estate tax.

Understanding the difference between the state and federal estate tax exemptions is crucial in estate planning. If your estate exceeds the New York exemption but falls below the federal exemption, you may still be subject to the state estate tax, even if you are not subject to the federal estate tax.

Gifting strategies to reduce your estate

Lifetime gifting is a powerful tool in estate planning, as it allows you to transfer wealth to your loved ones while you are still alive. By taking advantage of the annual gift tax exclusion, you can reduce the overall value of your estate and potentially avoid or minimize the estate tax. Under the current tax laws, you can gift up to $18,000 per person per year (or $36,000 for married couples) without incurring any gift tax.

In addition to the annual gift tax exclusion, you can also utilize the lifetime gift tax exemption, which is currently set at $13.61 million per individual. This means that you can gift up to $13.61 million during your lifetime without incurring any gift tax. However, it’s important to note that any gifts you make will reduce the amount of your estate tax exemption at the time of your death.

Another gifting strategy to consider is the use of a 529 college savings plan. By contributing to a 529 plan, you can effectively remove those assets from your estate, while also providing a tax-advantaged way to save for your loved ones’ education. Additionally, 529 plan contributions qualify for the annual gift tax exclusion, making them a particularly attractive option for estate planning.

Creating a trust to protect your assets

Trusts can be a powerful tool in estate planning, as they allow you to transfer assets to your beneficiaries in a controlled and tax-efficient manner. There are several types of trusts that you can consider, each with its own unique advantages and considerations.

One popular option is the revocable living trust. With a revocable living trust, you can transfer ownership of your assets to the trust while you are still alive, but maintain control and access to those assets. Upon your death, the assets in the trust are distributed to your designated beneficiaries, bypassing the probate process.

Another type of trust to consider is the irrevocable trust. Unlike a revocable living trust, an irrevocable trust cannot be modified or terminated once it has been established. However, this structure can provide significant tax benefits, as the assets in the trust are no longer considered part of your estate. Irrevocable trusts can be particularly useful for protecting assets from creditors or for minimizing estate taxes.

Utilizing life insurance to cover estate taxes

Life insurance can be a valuable tool in estate planning, particularly when it comes to addressing the potential estate tax liability. By purchasing a life insurance policy, you can ensure that your loved ones have the funds necessary to pay any estate taxes that may be owed upon your death.

There are several types of life insurance policies that can be used for this purpose, including term life insurance and permanent life insurance (such as whole life or universal life). The choice of policy will depend on your specific needs and financial goals, as well as the size of your estate and the anticipated estate tax liability.

In addition to providing a source of funds to pay estate taxes, life insurance can also be used to create liquidity within your estate. This can be particularly important if your estate is primarily composed of illiquid assets, such as real estate or a closely-held business. By using life insurance to generate cash, you can ensure that your heirs have the resources they need to pay any taxes or other expenses associated with your estate.

Considerations for business owners in estate planning

If you are a business owner, your estate planning strategy will require additional considerations and nuances. Your business assets, including real estate, equipment, and intellectual property, can significantly impact the value of your estate and the potential estate tax liability.

One key consideration for business owners is the use of succession planning. By developing a clear plan for the transfer of your business to your heirs or other designated successors, you can ensure a smooth transition and minimize the potential for disputes or tax complications. This may involve the use of buy-sell agreements, family limited partnerships, or other specialized business structures.

Working with a financial planner and estate planning attorney

Navigating the complexities of estate planning and minimizing your estate tax liability in New York can be a daunting task, especially if you are unfamiliar with the intricacies of the New York estate tax system. That’s why it’s crucial to work with a qualified financial advisor and estate planning attorney who can guide you through the process and help you develop a comprehensive strategy.

Remember, estate planning is an ongoing process, and it’s essential to review and update your plan as your circumstances and the tax landscape evolve. By staying informed, seeking professional guidance, and taking a proactive approach, you can ensure that your legacy is preserved and your loved ones are protected.

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Building Wealth Through Tax Planning Strategies

Building Wealth Through Tax Planning Strategies

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You have worked hard to accumulate wealth, but if you’re not careful, taxes can eat away at your hard-earned money. That’s why tax planning strategies are an important part of your wealth management plan. Here are some tips to help you address your tax burden and keep more of your money.

  • Start with a comprehensive plan: Implementing tax planning strategies is an ongoing process, so it’s essential to have a comprehensive plan that considers your short-term and long-term financial goals. A comprehensive strategy should also consider potential changes in tax laws and regulations that could affect your tax liability.
  • Evaluate your retirement contributions: Contributing to your retirement accounts can potentially affect your taxable income. For example, you can contribute up to $22,500 to your 401(k) or 403(b) plan in 2023, and if you’re over 50, you can make an additional catch-up contribution of $7,500. Contributing to a traditional IRA or a Roth IRA is another way to potentially reduce your taxable income.
  • Consider tax-efficient investments: Some investments are more tax-efficient than others. For example, municipal bonds are tax-exempt at the federal level, and some are also exempt from state and local taxes. Tax-efficient funds that invest in stocks with low turnover can also reduce your tax liability.
  • Take advantage of tax-loss harvesting: Tax-loss harvesting involves selling investments that have lost value to offset gains in other investments. This strategy can help you lower your tax bill and potentially rebalance your portfolio.
  • Work with a tax professional: Tax planning can be complex, so it’s a good idea to work with a tax professional who can help you navigate the process. A tax professional can also help you identify opportunities to reduce your tax liability and maximize your wealth.

Incorporating tax planning into your financial plan is critical to evaluate your tax needs over time, potentially reducing your tax burden and keeping more of your hard-earned money. Remember, tax-efficient planning is an ongoing process, so it’s essential to review your plan regularly to ensure that you’re taking advantage of all available tax-saving opportunities.

 

​The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Stratos Wealth Partners and LPL Financial do not offer tax advice or services.

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tax preparation

Haven’t Filed Your Taxes Yet? Be Aware of These Features

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As if the pandemic hasn’t already affected every other aspect of people’s lives, now there’s taxes. But in this case, the effect is positive. The different relief packages passed over the last year offer a host of features that can help taxpayers lower their 2020 tax bill. And if you are among the many who are filing your return later due to the extended filing deadline, you still have time to take advantage of these features.

So, as you sit down to prepare your tax return, keep in mind the following.

Stimulus checks aren’t taxable.

The millions of Americans who received stimulus checks in 2020 will not have to report it or pay taxes on it. If, for some reason, you were owed one but didn’t get it, or you did not receive the full amount that you were entitled to, you can get it in the form of a Recovery Rebate Credit when you file.

Unemployment benefits may not be taxable.

The latest relief package, the American Rescue Plan Act of 2021 (ARPA), passed in March, made the first $10,200 of unemployment benefits received by an individual taxpayer (or in the case of a joint return, received by each spouse) in 2020 tax free if your annual household income is under $150,000. For those who already filed their taxes and reported unemployment benefits before passage of the ARPA, the IRS will automatically recalculate the correct amount of taxable unemployment and refund any resulting tax overpayment (or apply it to other outstanding taxes owed).

Paycheck Protection Program (PPP) loan proceeds may be tax deductible.

For those businesses that received loans under the PPP, eligible expenses that were paid with loan proceeds may be deducted from taxable income. Keep in mind, however, that under the program, any loan forgiveness is subject to the approval of the Small Business Administration.

Those claiming the standard deduction still may be able to deduct $300 for charitable contributions.

In an effort to help charities hard-hit by the pandemic, the CARES Act allows taxpayers who take the standard deduction to deduct up to $300 in cash donations made in 2020. Usually, only those who itemize can write off donations to charity.

No penalties for early withdrawals from your retirement plan.

Normally, if you are under age 59½ and withdraw money from your qualified retirement plan — such as a 401(k) or IRA — you must pay a 10% early withdrawal tax and ordinary income tax on taxable portions of the distribution. But the CARES Act waived the penalty for early withdrawals made during 2020, up to $100,000, if you were impacted by coronavirus. What’s more, you are allowed to spread out any taxable income related to such distributions over a three-year period rather than reporting it all in your 2020 taxes.

There are a number of other tax provisions contained in the different relief packages that could also potentially reduce your tax bite for the 2020 tax year. If you are not already working with a tax professional, now may be the year to do so, as a professional may be able to identify other one-time opportunities to lower your 2020 tax bill.

                                                                                                                                                                            

This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Converting a Traditional IRA to a Roth IRA

Converting a Traditional IRA to a Roth IRA

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Thinking of Converting Your Traditional IRA to a Roth? Now May Be the Time

Anyone who is thinking of converting a traditional IRA to a Roth IRA may want to consider do it this year. Why? Because today’s unique conditions create an opportunity to minimize the tax bite from converting. In fact, many have already taken advantage of this opportunity, with one provider reporting a 67% increase during the first four months of 2020 compared to a year earlier.1

But before you begin to decide whether or not to convert, make sure you are familiar with what’s involved with a Roth conversion.

What’s a Roth Conversion?

When you convert your traditional IRA to a Roth IRA, any deductible contributions you had made, along with any investment earnings, are taxed as ordinary income for the year of the conversion. That means the taxable value of the conversion could push you into higher federal and state tax brackets.

You will be responsible for full payment of all taxes in the year the conversion is made. If you use assets from the traditional IRA to pay those taxes, the tax amounts could be treated as premature withdrawals, so you could be subject to additional taxes and penalties.

Depending upon your personal financial situation, a Roth IRA conversion could potentially provide a tax-adjusted benefit over time, provided you meet the eligibility requirements.

Why Now?

The coronavirus pandemic has created unique conditions that may make a Roth conversion more attractive than usual.

Your taxable income may be lower

If, like millions of Americans, you have been furloughed or laid off, or your sales commissions are down, you will likely report lower taxable income for 2020. This may put you in a lower tax bracket so that monies converted to a Roth would be taxed at a lower rate than would otherwise apply (unless the amount converted pushes you into a higher bracket). For instance, converting a $15,000 IRA when your marginal federal tax rate is 12% saves $1,500 of tax compared to converting at a 22% marginal rate — and that does not include state tax, which might also drop.2

Your business may incur a loss

The pandemic is causing many businesses to close or incur a loss. If you expect to report a business loss on your personal return, you may be able to convert to a Roth at a reduced tax cost. With the Roth conversion creating additional income, you could use the loss generated by the business to offset some or all of that income.

Your IRA balance may be down

To minimize taxes, it’s better to convert assets when they’re low in value. Although U.S. stocks have recovered most of the ground lost in February and March, it’s possible your IRA balance may still be well off its peak, depending on how it is invested.

RMDs are suspended for 2020

As part of the CARES Act, required minimum distributions (RMDs) for traditional IRAs and qualified retirement plans were suspended for this year. Not taking distributions from a traditional IRA might keep or put you in a lower tax bracket by reducing your taxable income, making it even more desirable to convert to a Roth.

Current tax rates are low and could go up

The 2017 Tax Cuts and Jobs Act (TCJA) reduced federal tax rates, cutting the top marginal rate to 37%. That’s relatively low compared with recent history. Given the staggering price tag of the pandemic bailout (so far) and the ballooning budget deficit, it’s reasonable to assume that at some point, tax rates may increase. When this might happen is anyone’s guess, but converting while rates are relatively low is something to consider.

To Convert or Not?

Whether you would be better off leaving your funds in a traditional account or moving all or some of them to a Roth IRA will depend upon your personal circumstances. Generally speaking, Roth IRA conversions are best suited for investors who have significant time until retirement, are high wage earners, think they may be in a higher tax bracket at retirement, or are looking for an estate planning tool to help pass wealth to their heirs.

Whatever your circumstances, keep in mind that IRS rules governing IRAs and conversions are complex. So be sure to consult with a financial or tax professional before deciding.

Source/Disclaimer:

1Money, Roth IRA Conversions Are Surging. Here’s Why This Retirement Savings Strategy Is So Popular Right Now, June 4, 2020.

2Example is for illustration only. Your results will differ.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year your convert, you must do so before converting to a Roth IRA.

 This material was prepared by LPL Financial. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that they views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. All performance referenced is historical and is no guarantee of future results.

 

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Lowering your taxes with year end planning

Lower Your Tax Bill with Year-End Planning

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Tips to Help Lower Your Tax Bill with Year-End Planning

As the end of the year draws near, the last thing anyone wants to think about is taxes. But if you are looking for ways to minimize your tax bill, there’s no better time for tax planning than before year-end. That’s because there are a number of tax-smart strategies you can implement now that may reduce your tax bill come April 15 or in the years ahead.

Consider how the following strategies might help to lower your taxes.

Put Losses to Work

If you have capital gains, IRS rules allow you to offset your gains with capital losses. Short-term gains (on assets held one year or less) are reduced by short-term losses, and long-term gains (on assets held longer than a year) are reduced by long-term losses. If your net long-term capital gain is more than your net short-term capital loss, the net capital gain generally is taxed at a top rate of 20%.1 A net short-term capital gain, on the other hand, is taxed at ordinary rates, which range as high as 37%. To the extent that losses exceed gains, you can deduct up to $3,000 in capital losses against ordinary income on that year’s tax return and carry forward any unused losses for future years.

Given these rules, there are several actions you should consider:

  • Avoid short-term capital gains when possible, as these are taxed at higher ordinary rates. Unless you have short-term capital losses to offset them, consider holding the assets until you’ve met the long-term holding period (generally, more than one year).
  • Take a good look at your portfolio before year-end and estimate your gains and losses. Some investments, such as mutual funds, incur trading gains or losses that must be reported on your tax return and are difficult to predict. But most capital gains and losses will be triggered by the sale of the asset, which you usually control. Are there some winners that have enjoyed a run and are ripe for selling? Are there losers you would be better off liquidating? The important point is to cover as many of the gains with losses as you can, thereby minimizing your capital gains tax.
  • Consider taking capital losses before capital gains, since unused losses may be carried forward for use in future years, while gains must be taken in the year they are realized.

When determining whether or not to sell a given investment, keep in mind that a few down periods don’t mean you should sell simply to realize a loss. Stocks in particular are long-term investments, subject to ups and downs. Likewise, a healthy unrealized gain does not necessarily mean an investment is ripe for selling. Remember that past performance is no indication of future results; it is expectations
for future performance that count. Moreover, taxes should be only one consideration in any decision to sell or hold an investment.

IRAs: Contribute, Distribute, or Convert

One simple way of reducing your taxes is to contribute to a traditional IRA, if you are eligible for tax-deductible contributions. Contribution limits for the 2019 tax year — which may be made until April 15, 2020 — are $6,000 per individual and $7,000 for those aged 50 or older. Note that deductibility phases out above certain income levels, depending upon your filing status and whether you (or your spouse) are covered by an employer-sponsored retirement plan.

An important year-end consideration for older IRA holders is whether or not they have taken required minimum distributions. The IRS requires account holders aged 70½ or older to withdraw specified amounts from their traditional IRA each year. These amounts vary depending on your age. If you have not taken the required distributions in a given year, the IRS will impose a 50% tax on the shortfall. So make sure you take the required minimums for the year.

Another consideration for traditional IRA holders is whether to convert to a Roth IRA. If you expect your tax rate to increase in the future — either because of rising earnings or a change in tax laws — converting to a Roth may make sense, especially if you are still a ways from retirement. You will have to pay taxes on any pretax contributions and earnings in your traditional IRA for the year you convert, but withdrawals from a Roth IRA are tax free and penalty free as long as you’re at least 59½ and at least five years have passed since you first opened a Roth IRA. If you have a nondeductible traditional IRA (i.e., your contributions did not qualify for a tax deduction because your income was not within the parameters established by the IRS), investment earnings will be taxed but the amount of your contributions will not. The conversion will not trigger the 10% additional tax for early withdrawals.

These are just steps you can take today to help lighten your tax burden. Work with a financial professional and tax advisor to see what you can do now to reduce your tax bill.

1A 3.8% tax on net investment income may effectively increase the top rate on long-term capital gains to 23.8% for single taxpayers with a modified adjusted gross income (MAGI) of more than $200,000 and to those who are married and filing jointly with a MAGI of more than $250,000.

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converting to a Roth IRA

Roth IRA Conversion

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Good Window of Opportunity for Roth IRA Conversions

The Roth IRA is a powerful tax-favored retirement option since it can offer a hedge against future tax-rate increases. But beyond tax planning considerations,

Roth IRAs have several important advantages over traditional IRAs:

  1. Unlike a traditional IRA, a Roth IRA distribution is tax-free if you’ve had the account open at least five years, and reached the age of 59½, become disabled or died.
  1. You can make contributions to your Roth IRA after age 70½, depending on whether you fall within the earned income limits.
  2. Roth IRAs are not subject to the traditional IRA rules for required minimum distributions at age 70½.

The Internal Revenue Code allows IRA owners to convert significant sums from traditional IRAs to Roth IRAs. But you have to follow these important rules (among others):

  • The ability to contribute tails off at higher incomes. For 2019, the eligibility to make annual Roth IRA contributions is phased out between modified adjusted gross income (MAGI) levels of $122,000 to $137,000 (unmarried individuals) and $193,000 to $203,000 (married joint filers).1
  • The conversion is treated as a taxable distribution from your traditional IRA. Doing a conversion likely will trigger a bigger federal income tax bill and possibly a larger state income tax bill. However, today’s lower federal income tax rates might be the lowest you’ll see in your lifetime, and the tax benefits of avoiding higher taxes in future years may extend to family members after death.

 

Many tax experts suggest that the best reason to convert some or all of your traditional IRA to a Roth IRA is if you believe your tax rate during retirement will be the same or higher than what you are paying currently. Since you’re no longer allowed to reverse a Roth IRA conversion, it’s important to understand the tax ramifications. Talk to your tax advisor before taking any action.

 

Traditional vs. Roth IRA: High-level Comparison

Here is a simplified comparison of IRA rules and tax benefits. Remember, tax laws are complex and subject to change. Consult a tax advisor about your individual situation before taking action.

 

Traditional IRA Roth IRA
Age limits for contributing You must be under 70½ to contribute. You can contribute to a Roth IRA at any age.
Income limits for contributions Your contributions can’t exceed the amount of income you earned in that year or other IRS-imposed limits. Your contributions can’t exceed the amount of income you earned in that year or other IRS-imposed limits, and can be reduced or eliminated based on your modified adjusted gross income.
2019 tax-year contribution limits If you are under age 50, you can contribute up to $6,000. If you are older than age 50, you can contribute $7,000. (Limits can be lower based on your income.) If you are under age 50, you can contribute up to $6,000. If you are older than age 50, you can contribute $7,000. (Limits can be lower based on your income.)
Claiming deductions on tax return You may be able to claim all or some of your contributions. You cannot deduct your Roth IRA contribution.

 

 

 

 

 

 

1       Source: Bill Bischoff, “How the new tax law created a ‘perfect storm’ for Roth IRA conversions in 2019,” MarketWatch.com, Jan. 16, 2019. https://www.marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26

 

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.

 

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com

 

© 2019 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.

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tax efficient investing

Tax Efficient Investing

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Five Strategies for Tax Efficient Investing

As just about every investor knows, it’s not what your investments earn, but what they earn after taxes that counts. After factoring in federal income and capital gains taxes, the alternative minimum tax, and any applicable state and local taxes, your investments’ returns in any given year may be reduced by 40% or more.

For example, if you earned an average 8% rate of return annually on an investment taxed at 28%, your after-tax rate of return would be 5.76%. A $50,000 investment earning 8% annually would be worth $107,946 after 10 years; at 5.76%, it would be worth only $87,536. Reducing your tax liability is key to building the value of your assets, especially if you are in one of the higher income tax brackets. Here are five ways to potentially help lower your tax bill.1

Invest in Tax-Deferred and Tax-Free Accounts

Tax-deferred accounts include company-sponsored retirement savings accounts such as traditional 401(k) and 403(b) plans, traditional individual retirement accounts (IRAs), and annuities. Contributions to these accounts may be made on a pretax basis (i.e., the contributions may be tax deductible) or on an after-tax basis (i.e., the contributions are not tax deductible). More important, investment earnings compound tax deferred until withdrawal, typically in retirement, when you may be in a lower tax bracket. Contributions to non-qualified annuities, Roth IRAs, and Roth-style employer-sponsored savings plans are not tax deductible. Earnings that accumulate in Roth accounts can be withdrawn tax free if you have held the account for at least five years and meet the requirements for a qualified distribution.

Pitfalls to avoid: Withdrawals prior to age 59½ from a qualified retirement plan, IRA, Roth IRA, or annuity may be subject not only to ordinary income tax, but also to an additional 10% federal tax. In addition, early withdrawals from annuities may be subject to additional penalties charged by the issuing insurance company. Also, if you have significant investments, in addition to money you contribute to your retirement plans, consider your overall portfolio when deciding which investments to select for your tax-deferred accounts. If your effective tax rate — that is, the average percentage of income taxes you pay for the year — is higher than 15%, you’ll want to evaluate whether investments that earn most of their returns in the form of long-term capital gains might be better held outside of a tax-deferred account. That’s because withdrawals from tax-deferred accounts generally will be taxed at your ordinary income tax rate, which may be higher than your long-term capital gains tax rate (see “Income vs. Capital Gains”).

Income vs. Capital Gains
Generally, interest income is taxed as ordinary income in the year received and qualified dividends are taxed at a top rate of 20%. (Note that an additional 3.8% tax on investment income also may apply to both interest income and qualified (or nonqualified) dividends.) A capital gain (or loss) — the difference between the cost basis of a security and its current price — is not taxed until the gain or loss is realized. For individual stocks and bonds, you realize the gain or loss when the security is sold. However, with mutual funds you may have received taxable capital gains distributions on shares you own. Investments you (or the fund manager) have held 12 months or less are considered short term, and those capital gains are taxed at the same rates as ordinary income. For investments held more than 12 months (considered long term), those capital gains are taxed at no more than 20%, although an additional 3.8% tax on investment income may apply. The actual rate will depend on your tax bracket and how long you have owned the investment.

Consider Government and Municipal Bonds

Interest on U.S. government issues is subject to federal taxes but is exempt from state taxes. Municipal bond income is generally exempt from federal taxes, and municipal bonds issued in-state may be free of state and local taxes as well. An investor in the 33% federal income-tax bracket would have to earn 7.46% on a taxable bond, before state taxes, to equal the tax-exempt return of 5% offered by a municipal bond. Sold prior to maturity or bought through a bond fund, government and municipal bonds are subject to market fluctuations and may be worth less than the original cost upon redemption.

Pitfalls to avoid: If you live in a state with high state income tax rates, be sure to compare the true taxable-equivalent yield of government issues, corporate bonds, and in-state municipal issues. Many calculations of taxable-equivalent yield do not take into account the state tax exemption on government issues. Because interest income (but not capital gains) on municipal bonds is already exempt from federal taxes, there’s generally no need to keep them in tax-deferred accounts. Finally, income derived from certain types of municipal bond issues, known as private activity bonds, may be a tax-preference item subject to the federal alternative minimum tax.

Look for Tax-Efficient Investments

Tax-managed or tax-efficient investment accounts and mutual funds are managed in ways that may help reduce their taxable distributions. Investment managers may employ a combination of tactics, such as minimizing portfolio turnover, investing in stocks that do not pay dividends, and selectively selling stocks that have become less attractive at a loss to counterbalance taxable gains elsewhere in the portfolio. In years when returns on the broader market are flat or negative, investors tend to become more aware of capital gains generated by portfolio turnover, since the resulting tax liability can offset any gain or exacerbate a negative return on the investment.

Pitfalls to avoid: Taxes are an important consideration in selecting investments but should not be the primary concern. A portfolio manager must balance the tax consequences of selling a position that will generate a capital gain versus the relative market opportunity lost by holding a less-than-attractive investment. Some mutual funds that have low turnover also inherently carry an above-average level of undistributed capital gains. When you buy these shares, you effectively buy this undistributed tax liability.

Put Losses to Work

At times, you may be able to use losses in your investment portfolio to help offset realized gains. It’s a good idea to evaluate your holdings periodically to assess whether an investment still offers the long-term potential you anticipated when you purchased it. Your realized capital losses in a given tax year must first be used to offset realized capital gains. If you have “leftover” capital losses, you can offset up to $3,000 against ordinary income. Any remainder can be carried forward to offset gains or income in future years, subject to certain limitations.

Pitfalls to avoid: A few down periods don’t necessarily mean you should sell simply to realize a loss. Stocks in particular are long-term investments subject to ups and downs. However, if your outlook on an investment has changed, you may be able to use a loss to your advantage.

Keep Good Records

Keep records of purchases, sales, distributions, and dividend reinvestments so that you can properly calculate the basis of shares you own and choose the shares you sell in order to minimize your taxable gain or maximize your deductible loss.

Pitfalls to avoid: If you overlook mutual fund dividends and capital gains distributions that you have reinvested, you may accidentally pay the tax twice — once on the distribution and again on any capital gains (or underreported loss) — when you eventually sell the shares.

Keeping an eye on how taxes can affect your investments is one of the easiest ways you can enhance your returns over time. For more information about the tax aspects of investing, consult a qualified tax advisor.

 

 

 1Example does not include taxes or fees. This information is general in nature and is not meant as tax advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation.

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

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Year End Tax Planning: TCJA Edition

Year End Tax Planning: TCJA Edition

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Year End Tax Planning: TCJA Edition

With the passage of the Tax Cuts and Jobs Act (TCJA) last December, year-end tax planning could impact even more individuals. A lot has already been written about how it has limited two key itemized deductions: mortgage interest and state and local taxes (SALT). There are also many potential benefits. The TCJA expands the standard deduction and availability of the child tax credit, made reforms to itemized deductions and the alternative minimum tax, and lowers marginal tax rates. Given these changes, here are some things to consider going into the end of the year:

 

  • Is Tax Deferral Still the Way to Go?- Some individual taxpayers will see their effective tax rate go down in 2018. If you are one of those people, you may want to rethink making tax-deferred contributions to your retirement savings. If you are already in a low tax bracket, you may see more of a long-term benefit by contributing after tax money. In addition to a Roth IRA, some employer retirement plans allow for Roth contributions. Withdrawals from the account may be tax free, as long as they are considered qualified. There are some limitations and restrictions. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. It should also be noted that future tax laws can change at any time and may impact the tax benefits of Roth IRAs.

 

  • Should You Convert Tax-Deferred to Roth?- In addition to making new retirement contributions with after tax money, you may benefit from converting money you have in a tax-deferred retirement account to a Roth IRA. Keep in mind, that any money that you convert to a Roth IRA is generally subject to income taxation in the year that you do it. But over the long term, the money will continue to grow tax-free and won’t be subject to required minimum distributions (RMD) in retirement. Roth conversions must be done by December 31st. Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regard to executing a conversion from a Traditional IRA to a Roth IRA. 

 

  • Should You Take Out More Than Your RMD?- For some retirees with a low income or high medical deductions (threshold decreased from 10% of AGI to 7.5% for 2018), it may actually make sense to take more out of retirement accounts than the required minimum distribution. Even if you don’t need the money to cover expenses, the amount taken above the RMD can be converted to a Roth.

 

  • Bunching Up Your Deductions- With the combination of the standard deduction being doubled and big-ticket deductions, like mortgage interest and SALT, being limited, it is more difficult to meet the threshold for itemizing deductions. With careful planning, you may be able to bunch up deductions like charitable contributions, medical expenses, and unreimbursed employee expenses in one calendar year to get you over the threshold. For example, if you normally make $5,000 in charitable contributions in a calendar year, consider contributing $10,000 to a charity or donor advised fund, and nothing the following year. The donor advised fund will allow you to take the deduction in the year the contribution is made, but offers discretion to give money out over time to the charities of your choosing. While donor advised funds have many advantages, some disadvantages to be aware of include but are not limited to possible account minimums, strict limits on grant allocations, management fees and the potential that future tax laws may change at any time that may impact the tax treatment and benefits of donor advised funds

 

  • Consider a QCD- If you are already age 70 ½, and making charitable contributions, you may consider a Qualified Charitable Distribution (QCD). A QCD doesn’t give you a charitable deduction but it counts against satisfying your required minimum distribution for the year. Therefore, it is excluded from your taxable income. Like your RMD, the deadline for this distribution is December 31st.

 

Keep in mind that these suggestions are only intended to be used as general information and are not intended to be tax advice. You should always consult a tax professional before making tax planning decisions and work with a trusted financial advisor to see how the recent tax laws can affect your investment plan.

 

 

Securities offered through LPL Financial, Member of FINRA/SIPC and investment advice offered through Stratos Wealth Partners Ltd., a Registered Investment Advisor. Stratos Wealth Partners, Ltd. and Lob Planning Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stratos Wealth Partners, Lob Planning Group and LPL Financial do not provide legal and/or tax advice or services. Please consult your legal and/or tax advisor regarding your specific situation.

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