8 Tax Items to Review with Your "Investment Person"

Feeling the bite from your tax return? The best way to minimize taxes going forward is by starting to plan now for future taxes. It is important to review your return with your financial planner, investment advisor or financial advisor so that they can help you make changes to drive your tax bill lower over time. We review client taxes each year and here are 8 key places where we often find opportunities to optimize after-tax income and investment returns:

1. Income and Marginal Tax Rate:

   This is the rate you would pay on the next dollar of income you earn. This helps us understand whether you are in a relatively low or high tax bracket for your lifetime. Understanding this is important for:

   • Income realization and retirement account contribution planning.

   • Minimizing exposure to the 3.8% Net Investment Income surtax for taxpayers with adjusted incomes over $200,000.

   • Taking advantage of deductions and credits that phase-out at certain levels of income. Understanding where you are against those particular thresholds can help you limit income if you are close to a threshold in a particular year.

2. Capital Gains:

   Capital gains are earnings (losses) from selling appreciated (depreciated) assets. Long-term capital gains are taxed at lower rates than short-term gains. If too many gains are short-term in nature, your portfolio should be optimized to help reduce taxes.

3. Qualified and Ordinary Dividends:

   Like capital gains taxes, dividends are taxed at lower rates when they are held for longer time periods. If a large percentage of your dividend income is not qualified, your portfolio can be optimized to reduce taxes.  

4. Carry Forward Losses:

   Carry-forward losses can be used to offset future capital gains, especially after years with large losses. It’s important for your financial team to understand your losses from the prior year as well as any retained losses that you may be able to use to offset future gains.

5. itemize deductions?:

   Since the Tax Cut and Job Act of 2017, many taxpayers simply claim the standard deduction instead of itemizing deductions each year. One way to make the jump to itemizing deductions is by bunching write-offs into single calendar years. Knowing which deduction you used in prior years helps determine whether bunching may be a good strategy going forward.

6. Medicare Premium Surcharges:

   If you use Medicare insurance, your premiums are based on your taxable income! The rates increase with income, so ensuring you stay below the next threshold can save you significant money in future years.

7. Retirement Account Considerations:

   In addition to contributions, reviewing your tax situation is key to determining whether strategies like ROTH Conversions, Back-Door ROTHs and Qualified Charitable Distributions make sense for your situation.

8. Business Income Considerations:

   Owners of small businesses are eligible for the qualified small business income (QBI) tax deductions and also special treatment on the sale of their stock, which is key for long-term financial planning.

We frequently say that years of good investment returns can be wiped out by poor tax planning. Therefore, it is critical that you coordinate your investments, taxes and estate plans to ensure they work together for your benefit over the long-term. If you have questions about how to apply the insights from your return to your investment situation, feel free to reach out to our team directly!.