Tax tricks you may not know about

Tax tips for your investments

  • Since long-term capital gains (LTCG) are usually taxed at low rates, you’re generally better off taking the $3,000 annual deduction against non-capital gains income. Here’s why: if you’re in the 35% tax bracket, you’ll save $1,050 by taking a $3,000 long-term capital loss. Using the loss against LTCG will save you no more $600, maybe less, depending on your tax bracket. State tax savings will be the same either way.
  • Losses on the sale of stock and other investments carry forward indefinitely. A friend recently mentioned she was hanging onto some “dog” stocks to offset a future land sale. She was happy to learn that she could sell now and her loss would carry forward indefinitely. In the meantime, she gets to take a $3,000/year deduction beginning in the year of sale.
  • If you are in the 15% bracket or lower, at least part of any LTCG will not be taxed. What you may not know, however, is that any capital gains that would otherwise push you into a higher bracket will be taxed. So, for example, if you are married and your taxable income is $52,500 in 2013, you will owe NO taxes on the first $20,000 of LTCG. Beyond that, your LTCG rate will be either 15% or 20%. But see my next point.
  • LTCG could cause you to pay the 3.8% Net Investment Income Tax (NIIT) if you are considered a high wage earner. Consult your tax or investment professional for more information.

Never waste a low tax bracket

If you are married filing jointly, the 15% bracket tops out at taxable income of $72,500 in 2013. That is after exemptions and itemized or standard deductions. That means a family of four with income of $100,000 taking the standard deduction has a marginal tax rate of only 15%. If you itemize, your taxable income will be lower. Our goal is to help clients use up their low tax brackets with income that otherwise would be taxed at higher rates in the future. Here are some ways to do that:

  • Sell LTCG property. This includes not only stocks and mutual funds, but, for example, raw land or rental property (but note that part of the gain on depreciated property will be taxed at higher rates).
  • If your LTCG is high enough to push you into the 25% or higher bracket, try to structure an installment sale to spread the gain over several years and take advantage of 0% rates for years to come.
  • Sell LTCG property and buy it back. Say you own a stock that has really appreciated and you want to hang on to it. Sell it and buy it back immediately. You’ll have a higher basis at little or no cost to you.
  • Convert part of your traditional IRA to a Roth IRA. We typically advise clients, no matter their age, to fill up their 15% bracket with Roth conversions. Future growth is tax-free and will escape the requirement to begin taking distributions at age 70-1/2.
  • Contribute to a Roth IRA, even if it you must divert some contributions from your 401k or deductible IRA. Over the long run, the tax-free growth will mean more than a deduction at 15% today. It’s usually a waste of time to try to guess what your income will be at retirement, if tax rates will rise or fall, etc. Low-rate taxes today are a small investment for a future tax-free stash you can spend or leave to your heirs, assuming you invest wisely. If you don’t, all bets are off.

Others who can use the above tactics to their advantage are:

  • Retirees living on Social Security and tax-free bonds.
  • Cyclical S-corporation or Limited Liability Company (LLC) business owners showing a loss.

As always, you should seek the advice of a qualified professional who can advise you about your specific facts and circumstances.

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