Reviewing Tax Planning Strategies

Posted on Monday, July 09, 2018

With marginal tax rates of up to 37% in 2018, income taxes can have a significant effect on your financial situation. There are basically three strategies to help reduce your income tax bill:

1. Reduce or eliminate taxes. The objective is to receive income in a nontaxable form or to find additional tax deductions, exemptions, or credits. For instance, you might want to consider municipal bonds, whose interest income is generally not subject to federal, and sometimes state and local, income taxes. Investigate investments that generate capital gains, such as growth stocks. Gains are not taxed until you actually sell the investment, and if held for over one year, capital gains are subject to 15% or 20% capital gains tax. 

The 20% capital gains rate only affects singles with taxable income above $425,800, married joint-filing couples with income above $479,000, heads of households with income above $452,400, and married individuals who file separate returns with income above $239,500.

Gains on investments held for less than a year are taxed at your ordinary income tax rate of 10, 12, 22, 24, 32, 35, or 37% for 2018 (in 2017, the rates were 10,15,25,28,33,35,and 39.6% but subject to possible change due to proposed tax reform).

If you have realized capital gains, you might want to offset those gains by selling investments with losses. Or consider investments that pay qualified dividends, which are taxed at capital gains tax rates.

2. Postpone the payment of income taxes until some time in the future. By postponing tax payments, your earnings compound on the entire balance, including the portion that will eventually be paid in taxes. You may also be in a lower tax bracket when taxes are paid. As an example, contribute as much as possible to retirement accounts, including employer plans and individual retirement accounts (IRAs).

3. Shift the tax burden to another individual. The objective of this technique is to transfer assets to other individuals so any income on those assets becomes taxable to those individuals, who may be in lower tax brackets. Typically, however, you must give up control of the asset. For instance, annually you can give tax-free gifts, up to $15,000 or $30,000 in 2018 (up from $14,000 and $28,000 respectively)  if the gift is split with your spouse, to any number of individuals. Any future income generated on those gifts then becomes taxable to those individuals. You may also want to use your lifetime gift tax exclusion which rises to $11.18 million for 2018 (up from $5.49 million in 2017) to make larger gifts.

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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