Every investor should have a thoughtful tax strategy, and for those that exceed certain income thresholds, proactive planning is all the more important.
Individual taxpayers with modified adjusted gross income (MAGI) of $200,000 face a 3.8% net investment income tax on the lesser of their net investment income amount or the amount by which their MAGI exceeds that $200,000 threshold. For couples filing jointly, the threshold is $250,000. These taxpayers are also subject to a 0.9% additional Medicare tax on wages and self-employment income over the same amount.
Here are some options to consider in the pursuit of identifying and implementing strategies that are most advantageous to your situation:
Improve your Portfolio’s Tax Efficiency
To get a sense of your annual tax liability, review your portfolio’s turnover ratio (the percentage of your holdings that have been replaced in a given year) and historical distributions. Then evaluate your investments, review your after-tax returns and consider opportunities to improve efficiencies.
Steps that may help reduce taxes include tax-loss harvesting – selling securities at a loss to offset capital gains taxes – and rebalancing your portfolio to include more tax-advantaged investments, such as municipal bonds, in higher-taxed locations.
Capitalize on Employer Benefits
If your employer offers a salary deferral plan like a 401(k), SIMPLE IRA, 403(b) or 457 plan, maximize your contributions to reduce your adjusted gross income and taxes over the long term. Similarly, if you’re eligible, maximize contributions to an employer’s Supplemental Employee Retirement Plan (SERP) to reduce your taxable income now and defer the compensation into later years when your tax rate may be lower.
Develop a Charitable Giving Plan
Charitable giving can reduce your tax burden while benefiting your favorite causes.
Consider:
- Giving appreciated securities to avoid capital gains, which increase your net investment income
- Bunching several years’ worth of donations into one year to exceed the standard deduction, making itemizing advantageous, and taking the standard deduction in the years that follow
- Establishing a donor-advised fund to make future donations and claim the current income tax deduction
- Contributing highly appreciated assets to a charitable remainder trust (CRT) to defer recognition of income over time
While these tax planning strategies may help you to reduce your overall tax bill, don’t lose sight of your risk tolerance and long-term financial goals.
Tom King CFP®, CLU®, AEP® is Registered Principal of King Financial Partners goKFP.com at 222 Blue Course Drive, State College, PA. King Financial is a team of credentialed professionals specializing in retirement, investment management, wealth transfer, and estate planning. Tom can be reached at Tom@goKFP.com or (814) 234-3300.
Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. Any opinions are those of Tom King and not necessarily those of Raymond James.
The process of rebalancing may result in tax consequences. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, or state or local taxes. Profits and losses on federally tax-exempt bonds may be subject to capital gains tax treatment. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Withdrawals from qualified accounts may be subject to income taxes, and prior to age 59½ a 10% federal penalty tax may apply. Sources: Raymond James Insight and Commentary; Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.© 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. King Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services.
