Just what you need, right? One more job to do between now and the end of the year. But taking a little time to meet with your HCM Advisor to review strategic tax and portfolio decisions before December 31st, could leave a little more money under the tree. Using tools that HCM has developed makes reviewing your financial plan easier than you may think.
Year End Tax Planning
Using the HCM Tax Bracket Analyzer™, we will partner with your tax preparer to help make sure that the timing of your income and deductions minimizes your income tax bill. Remember, when the New Year arrives, for all practical purposes, the ability to do tax planning for 2016 is gone. Some things to think about include:
- Year-end gifting
- Bunching of deductions
- Timing of state and local tax payments
- Alternative minimum tax
- Kiddie Tax
- Maximizing deductible retirement plan deferrals
- Roth IRA conversions and re-characterizations
- Charitable gifting
- Deferring the recognition of income if possible
- Qualified Charitable Distributions (QCDs) to satisfy Required Minimum Distribution (RMD) requirements
- Deductible and non-deductible IRA contributions
- Maximizing your pre-tax contributions to your Health Savings Account or Flexible Spending Account
Your ordinary income tax rate is probably higher than your long-term capital gains rate, which applies to the sale of assets held for more than a year. For example, for 2016, the top marginal tax rate is 39.6%, which applies to any taxable income over $415,050 ($466,950 for married individuals filing jointly). By contrast, the long-term capital gains rate owed by taxpayers in the 39.6% tax bracket is 20%. In addition, higher income taxpayers, generally those with $200,000 for single taxpayers and $250,000 for joint filers may also pay an additional 3.8% depending on their net investment income. These rules also generally apply to qualified dividends. A qualified dividend is a type of dividend to which capital gains tax rates are applied. These tax rates are usually lower than regular income tax rates.
For most investors, those in tax brackets between 25% and 35%, long-term capital gains and qualified dividends are taxed at 15%. Taxpayers in the lowest tax brackets,15% or less, are taxed at 0% on any long-term capital gains and qualified dividends.
With so much variability in how portfolio income is taxed, it makes sense to take a look at this area as part of your year-end tax and retirement planning. HCM’s Tax Bracket Analyzer™ tool helps us manage the recognition of your controllable income to improve your tax efficiency.
Now is the time to consider the tax consequences of any capital gains or losses you've experienced this year. Though tax considerations should never be the primary driver of your investing decisions, there are often steps you can take before the end of the year to minimize the tax impact of portfolio profits.
Know when to fold 'em
If you have realized capital gains from selling securities at a profit (congratulations!) and you have no tax losses carried forward from previous years, you can sell positions that are currently trading below their cost to avoid being taxed on some or all of your gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling positions for the tax benefit they will provide is a common financial practice known as "tax-loss harvesting."
Using the HCM Tax Loss Harvesting System™ we can help you review your investment portfolio to determine whether or not there is an opportunity to reduce your tax liability by realizing losses on specific investments.
Know where to hold 'em
Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts in light of your overall asset allocation goals. HCM’s Tax Location Matrix™ tool helps you properly locate assets to ensure they are invested in a manner that generates the highest after-tax returns. Remember, it's not what you make that counts, it is how much you keep.
Date Posted: 10/19/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Wealth Accumulation or Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help.