Tax Planning
Tax Planning
Planning ahead of time can assist high-income taxpayers to lower their net investment income tax and supplementary Medicare tax bills.
Every investor should have a well-thought-out tax strategy, and for those who earn more than a certain amount, proactive planning is even more crucial.
Individual taxpayers with modified adjusted gross income (MAGI) of $200,000 are subject to a net investment income tax of 3.8 percent on the lesser of their net investment income or the amount by which their MAGI exceeds the $200,000 level. The threshold for married couples filing jointly is $250,000. These taxpayers are also subject to an additional 0.9 percent Medicare tax on wages and self-employment income in excess of the same amount.
Consult with your financial counsellor, as well as your accountant or tax expert, to identify and implement the best methods for your case.
Here are some options to think about.
Increase the tax efficiency of your portfolio.
Examine your portfolio’s turnover ratio (the percentage of your holdings that have been replaced in a given year) and past distributions to obtain an idea of your annual tax liability. Then, collaborate with your advisor to examine your assets, review your after-tax returns, and look for ways to increase efficiencies.
Tax-loss harvesting – selling securities at a loss to offset capital gains taxes – and restructuring your portfolio to incorporate more tax-advantaged investments, such as municipal bonds, in higher-taxed areas – are two steps that may help to lower taxes.
Take advantage of job benefits.
If your employer provides a salary deferral plan such as a 401(k), SIMPLE IRA, 403(b), or 457 plan, make the most of it to minimize your adjusted gross income and taxes in the long run. Similarly, if you’re eligible, make the most of your employer’s Supplemental Employee Retirement Plan (SERP) contributions to minimize your taxable income now and delay the payment to subsequent years when your tax rate may be lower.
A company health savings plan or flexible spending account is another sometimes neglected perk. Contributions are made using pre-tax dollars, which reduces your taxable income.
Create a charitable giving strategy.
Charitable giving can help you save money on taxes while also helping your favorite causes. Consider:
- Giving appreciated securities in order to prevent capital gains, which boost your net investment income
- combining multiple years’ worth of donations into one year in order to surpass the standard deduction, making itemizing advantageous, and accepting the standard deduction in subsequent years
- Creating a donor-advised fund in order to make future contributions and claim the current income tax deduction
- Contributing highly appreciated assets to a charitable residual trust (CRT) in order to defer income recognition over time
- While these tax planning tactics may assist you in lowering your overall tax payment, keep your risk tolerance and long-term financial goals in mind.