Mid-Year Tax Planning


If you just finished writing a hefty check to the IRS because you were subject to the Alternative Minimum Tax, Net Investment Income Tax, Additional Medicare Tax or earned significant capital gains on your investments, you probably don’t even want to think about taxes again until next spring. However, the reality is that there’s probably no better time than now to start planning to help you reduce your tax liability for 2015.

Of course, there’s no one single solution for reducing liability. And tax savings should never be the sole factor behind any investment decision, according to the Tax & Financial Planning Group for Wells Fargo Advisors. However, by thinking proactively about taxes and monitoring your use of tax-advantaged investments, you may be able to keep more of your money working for you.

Plan a summer tax meeting
By May, many tax professionals and Financial Advisors have wrapped up the current tax season. But that doesn’t mean you should avoid a conversation with your advisors so you can focus on your summer vacation plans. With April filings completed, your financial professional may have more time to consider tax planning for the year ahead,” notes Wells Fargo. “Plus, by midyear, you may have a better idea of the income or other financial changes you may be facing in 2015.”

Start with tax-friendly accounts
Many high-net-worth (and often highly taxed) individuals don’t take full advantage of the tax-advantaged accounts available to them. Why not? Primarily because eligibility and withdrawal rules can seem unusually complex. Common tax-advantaged accounts include 529 college savings plans, personal IRAs, Roth IRAs, and workplace 401(k) or 403(b) retirement plans. In addition, a growing number of employers now offer Roth 401(k)s, which combine the benefits of a traditional retirement plan and a Roth IRA, and cash-balance retirement plans, which are hybrids of a traditional pension and a 401(k).  By midyear, you may have a better idea of the income or other financial changes you may be facing.

Balance your tax obligations
No one can be sure what changes Congress will make to U.S. tax rates in the future — or what tax bracket you might fall into when you retire. This is an important reason to hold a wide range of investments — some that are taxable when you withdraw them in retirement and some that are completely tax-free in the future.

“This is a good reason not to put all of your investable assets in your workplace retirement plan or a personal IRA, for instance,” says Wells Fargo. “You could end up creating a very high-tax income stream after you stop working, when you can least afford it.”  Work with your tax advisor to make sure your tax commitments are balanced.

Consider “location, location, location”
If you’re investing in tax-advantaged accounts such as an IRA or work retirement plan to go along with after-tax investment accounts, you may want to include different types of holdings in each.  For instance, you might include low-tax investments — such as municipal bonds, tax deferred annuities or stocks that pay qualified dividends — in your after-tax accounts and higher-tax investments — such as corporate or U.S. government bonds — in your tax-sheltered accounts.

Straddle tax years when possible
There might be times when it make sense to liquidate some tax-incurring investments at the end of one tax year, and then wait and sell additional investments in the early part of the following tax year to spread out your tax exposure. Or if you anticipate a significant income change (up or down), you might want to either accelerate tax deductions into the current year or defer them to the following year to pay less in taxes. These kinds of strategies are best decided with the help of your or tax professional during a midyear meeting.

Don’t overlook the Roth — for your kids and grandkids
If leaving a family legacy is important to you, one way to do so may be to contribute to a Roth account for your children and grandchildren, starting in their teen years. Even though you won’t get a tax break for doing so, making contributions to this account is one way to harness some of the tax-free advantages of the Roth on your family’s behalf.  To contribute to a Roth, your child must have income from work. Contributions are limited to your child’s or grandchild’s actual compensation or the IRS maximum, whichever is less.  If you own your own business, you could hire your child to work for you during the summer.

The bottom line: Don’t wait until the end of the year to plan for next year’s taxes, because some of the best strategies may take a little time to consider or implement.  Contact Steve Siesser at ssiesser@verizon.net for more assistance.