With the awful winter we have been enduring on the east coast, many of our clients and followers have been taking advantage of the extra time inside to get a jump on taxes. While it is easy to simply start assembling your 1099’s and compiling your deductions, I want to ask you to take a moment and start thinking proactively about ways we can help reduce your 2014 tax bill. With the tax rate increase still fresh in our minds from last year, especially in light of the larger checks we will be writing come April 15th, it is not too early to be preemptive for the year ahead.
By means of summary, here are some of the changes that are affecting wage earners at the higher levels in the form of increased tax on dividends and capital gains.
Please also bear in mind the phase out of itemized deductions. Write offs like the interest on your mortgage, property taxes and charitable contributions will benefit you less than prior to 2013.
All itemized deductions are reduced by 3% of MAGI over 305,050 for married couples filing jointly and single tax files over 254,200, to a maximum reduction of 80% in value.
So what do we need to be thinking about even now, at the start of the year to make your portfolio as tax efficient as possible? Here a few points to consider:
1) Asset Location- Now more than ever, we want to make certain that tax inefficient investment strategies that generate ordinary interest income and short term capital gains are held in tax preferential accounts such as your IRA, Roth IRA or 401k. Tax efficient strategies such as municipal bonds and tax managed equity portfolios that generate long term capital gains are more appropriate in taxable accounts.
2) Proactive Tax Loss Harvesting – As we are managing your portfolio it is important now and at the end of the year to attempt to offset realized gains with unrealized losses. Loss harvesting allows us to realize the unrealized loss, offset the given and wait 31 days to bring back the original investment to avoid the wash sale rule.
3) Gifting Strategies to Charity and Family – Using low basis securities to gift to charities and adult family members in low tax brackets remains an ideal planning strategy. Qualified charities who receive your gift of appreciated securities can sell shares tax free and provide you with a tax deduction based on the market value of the gift not your cost basis. This is also a viable strategy for adult family members who you wish to help. The gifting rules allow you to give $14,000 per person per year. Adult recipients in the lowest two tax brackets, 10% and 15% are subject to a 0% capital gain rate.
These are just a few considerations to reducing the impact of the higher tax environment. For my white paper on how to Navigate Through the 2014 Tax Laws, please email me at gsarian@hightoweradvisors.com.
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