Tax Strategies to Maximize Your WealthSubmitted by Kaizen Financial Advisors, LLC on December 7th, 2018
The year is winding up and Tax Day is not far away. At Kaizen, we think about taxes year-round and are always looking for opportunities to minimize your tax bill. In this newsletter, we wanted to share some the tax savings strategies we regularly evaluate on your behalf. Be aware that not all opportunities are available to every tax filer, some are dependent on filing method, ability to itemize, or even age. Let’s look:
“Bunching” to Itemize
Due to the recently passed Tax Cuts and Jobs Act of 2017, less people will itemize deductions. If you are on the cusp of itemizing, consider “bunching”. This where you plan to itemize your deductions every other year by bunching your itemized deductions within the year’s you plan to itemize. For example, giving two years of charitable donations in a single year or bunching medical costs each year might be strategies to use.
With respect to charitable giving there are several great tax strategies one can utilize. If you are 70.5 or older and subject to RMDs (Required Minimum Distributions) from your IRAs, consider donating all or part of your RMD directly to a charity. This removes the donated amount from your taxable income making that portion of your RMD tax free.
Donating appreciated securities to charity is another option. Let’s say you have shares of stock you purchased for $10/share that are now worth $100/share. If you sold the shares you would be subject to capital gains tax. If, instead, you transfer the shares directly to a charity, they would receive the value shares without any tax consequences, and you would recognize the same amount as a tax deduction for the donation.
A third charitable giving strategy is the creation of a Donor Advised Fund. This fund allows you to make a charitable contribution, receive an immediate tax deduction, and then make charitable contributions from the fund over time. Charitable donations from the fund can be spread over many years, but you get to claim the entire deduction in the year in which you contributed the money.
Tax loss harvesting
Another popular tax minimization strategy is “tax loss harvesting”. Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or "harvesting" a loss, investors can offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining an optimal asset allocation and expected returns. Unused offsets will carry forward into future tax years.
Capital Gains Distributions
Some securities are more tax efficient than others. Despite their similarities, mutual funds tend to distribute more capital gains to shareholders then ETFs (Exchange Traded Funds). You might be surprised that you can receive capital gains distributions from funds even when you personally experienced losses in that position. Funds often disclose estimated capital gains distributions prior to year-end, allowing investor’s time to adjust if advantageous. We review your holdings for capital gain distributions and make recommendation for changes, so you don’t get hit with an unexpected tax bill.
Asset location is a tax minimization strategy that takes advantage of the fact that different types of investments get different tax treatments. Using this strategy, we determine which securities should be held in tax-deferred and tax-exempt accounts and which securities should be held in taxable accounts in order to maximize after-tax returns.
How a security is taxed will determine where it should be located. Under the current tax code, dividends and capital gains get favorable treatment while interest gets taxed at your marginal tax bracket. The current rate for dividends and capital gains is only 15% for most and 20% at the highest rate and marginal rates are taxed at anywhere between 22% - 37%. So when we are designing your portfolio we keep this in mind. When possible we put equity investments, which generate returns from dividends and capital gains (taxed at the lower rates) in a brokerage account and put bonds which pay ordinary income in your IRA.
At Kaizen, we manage investments and provide financial advice with taxes in mind. We realize that minimizing taxes means Maximizing YOUR Wealth. If you have any questions regarding tax optimization opportunities or whether you are optimally taking advantage of them, please don’t hesitate to reach out to your Kaizen Advisor.