Tax Strategies to Consider with your Financial Professionals

​The beginning of a new year leads us to reconciling our finances for the prior year with the immediate chore of getting ready for the April 15 deadline.  This year I encourage you to discuss with your financial planner or accountant whether any of the below tax saving strategies are right for you:

• Charitable Remainder Trust  If you have a highly appreciated asset, then a high long-term capital gain could push you into a higher tax bracket. For example a married couple falling $10,000 under the 25% tax bracket would pay capital gain tax rate of 0.  Once they are in the 25% tax bracket their capital gains tax rate is 15%.  The sale of any asset, such as building, with $100,000 long-term capital gain would push them into the 25% tax bracket and result in them paying the 15% rate on $90,000 of the $100,000 capital gain.  However, if the building were sold through a 10-year charitable remainder trust, which paid the couple $10,000 for 10 years, then the couple would never enter the 25% tax bracket and their rate would remain 0.

• Fill up your tax bracket with Roth Conversion.  If when you retire you may actually be in a higher tax bracket – i.e., you have a large IRA and you will have fewer deductions e.g., your mortgage is paid off  - then consider converting part of the traditional IRA to a Roth IRA.  For example, today with $130,000 AGI filing jointly, you are in the 25% tax bracket but when you retire you will be in the 28% bracket.   But since the top of the 25% bracket is $148,850, you have $18,850 ($148,850 -$130,000) that you can convert to a Roth IRA.  You will now pay 25% tax on that $18,850 that you converted rather than paying 28% that you will pay when you retire.

 

• Take IRA Distributions at 59.5 years old  Once you reach the age of 59 ½ years old you can take distributions without a penalty.  If Required Minimum Distributions (“RMD”) would push you into higher tax bracket once you reached 70 ½ years old, then similarly to the Roth Conversion you can fill up your current tax bracket with distributions between the ages of 59 ½ and 70 ½ - thereby reducing the risk that RMDs will push you into a higher tax bracket.

These are just three examples that happen to be relevant to estate planning.   But if you are not already working with a professional on these tax strategies, please let me know and I will be happy to recommend a few individuals.
 
David