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Jun 14, 201910:34 AMOpen Mic

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10 portfolio strategies to help save on your income tax bill

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6. Hold investments longer than one year

Investments held for more than one year (366 days or more) are taxed at capital gains rates, while investments held for one year or less are taxed at ordinary income rates. For the vast majority of taxpayers, capital gains taxes will be lower than ordinary income rates. If your tax return reflects a number of sales held for one year or less, then there is a possibility that your broker/advisor may be disregarding the tax consequences of transactions, and you may be paying more in tax than you should.

7. Tax lot accounting

When you need to take gains, consider selling those shares with the lowest income tax impact first. This requires carefully reviewing the tax basis for all shares that are held. This will generally mean selling any shares with a loss first, then selling the shares with a long-term gain and the highest basis next. Discuss these aspects with your advisors/broker to make sure they are paying attention to this. If for simplicity and easy recordkeeping they simply sell the shares with the lowest basis first, it may cause a higher tax bill for you!

8. Donate appreciated shares

If you are able to itemize charitable deductions, you may want to consider gifting highly appreciated stock or shares of mutual funds (held for more than one year) rather than cash. The cash can then be used to reinvest at a higher basis or be used to fund living expenses. You will not only avoid capital gains tax by not selling the stock but also benefit from a deduction equal to the fair market value of the stock. Be aware that if you donate stock you’ve held less than a year, the deduction will be limited to cost basis. If a stock has lost value, it’s probably better to sell it, capture a capital loss, and donate the cash.

9. Qualified charitable distributions

If you are over 70.5 years old and make gifts to charity, then you should consider a qualified charitable distribution (QCD), which allows you to gift up to $100,000 directly from your IRA to a qualified charity. Any amount processed as a QCD counts toward the required minimum distribution (RMD) and reduces the taxable amount of the IRA distribution. This approach will lower both your adjusted gross income (AGI) and taxable income, resulting in lower overall tax liability. Taxpayers who do not expect to itemize in 2019 and need to take an RMD in 2019 would be prime candidates for this strategy.

10. Take IRA distributions or complete Roth conversions early if in low income tax bracket

If you are in a federal tax bracket of 22 percent or lower (certainly if you’re in the 12 percent bracket or lower) and over the age of 59.5, consider taking some distributions from your retirement accounts (IRAs and 401(k)s) or completing Roth conversions before the required age of 70.5. Why would anyone ever want to pay tax early? Because you will likely be required to take larger distributions from your IRAs after age 70.5 that may push you into even higher tax brackets then. If so, you want to use up these lower tax brackets now because you will never have the opportunity again to take the distributions or complete Roth conversions at such a low tax bracket. The prime candidates for this strategy are taxpayers who are retired over age 59.5 with little income (i.e., before you start taking Social Security payments or if you only have small Social Security payments).

Annuities as a tax-savings strategy

One note on annuities as a tax savings strategy. Annuities can defer income tax and are often marketed as a tax savings strategy. However, many annuities also have high fees and sales charges, and they can lock up your funds for many years. Finally, all of the gains distributed from an annuity are taxed as ordinary income instead of the likely lower capital gains tax rates. There may be better tax-savings strategies outlined above compared to the potential overall cost of annuities.

Are any or all of these tax strategies being utilized in your portfolio?  If not, you may be missing out on tax savings that are available to you!

Dean T. Stange, JD, CFP, is a principal and senior financial advisor at Wipfli Financial Advisors LLC.

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