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Keep Your Investment Vehicles Out of the Tax Man’s Garage

5 Mid-Year Tune-ups You Should Do Right Now

Taxes clearly represent the proverbial two-edged sword: they pay for the necessary services our society requires such as good roads, hospitals, schools, etc.…but taxes also create limitations on lifestyle choices and the growth of investment portfolios. Reviewing tax strategies and selecting those which are applicable to your situation can meet your obligations while simultaneously preserving more of your wealth for your own personal and business needs. Planning for the inevitable now, at mid-year, can make a big difference at the end of fiscal 2016. Here are five strategies that may help increase your bottom line in a big way.

1. Take a Close Look at Your Investments

This year’s federal income tax rates on long-term capital gains and qualified dividends are 0%, 15%, and 20%. The maximum rate of 20% affects taxpayers with taxable income above $415,050 for single taxpayers, $466,950 for married joint-filing couples, and $441,000 for heads of households. Individuals with high income can also be subject to the 3.8% NITT (Net Investment Income Tax) which can result in a marginal long-term capital gains/qualified dividend tax rate that could reach as high as 23.8%. Though high, this is still substantially lower than the top regular tax rate of 39.6% (or 43.4% if the NITT applies). What can you do?

Tax 2

A. Lower Your Taxes by Holding Your Securities Longer. If your taxable accounts hold appreciated securities, owning them for at least one year and a day will make them qualified for the preferential long-term capital gains tax rates. Your short-term gains are taxed at your regular rate, which could be as high as 39.6% (43.4% if the NITT applies), so it might be smart and in your best interests to hold these securities a little longer. Whenever possible, consider meeting the more-than-one-year ownership rule for appreciated securities in your taxable accounts. (Tax consequences are not the only consideration for making a buy or sell decision; other factors are involved as well, of course.)

B. When You Sell Your Shares, Sell the Right Ones First. As a general rule, when you decide to sell stock or mutual fund shares, the shares that were purchased first are the ones that are sold first. This would be good news if you are intentionally trying to qualify for the long-term capital gain rate. However, situations sometimes arise when it could be better to sell shares you’ve held for less than a year. Deliberately selecting the shares you wish to sell can make a big difference at tax time. When you decide to sell shares other than those that were purchased first, you must properly notify your broker.

2. Tax-Free Income Might Be a Good Choice For You.

A. Retirement Plans Offer Great Benefits. Most retirement account earnings are tax-deferred, meaning your account grows without the burden of taxation; as you withdraw these funds later in life, when you are likely to be in a lower tax bracket, the deferred and reduced tax is paid then. Time is a valuable resource, providing a continuing opportunity for increased growth; the sooner you fund such an account, the sooner your account grows with its tax advantage. If you have the cash, there’s no need to wait until year-end or the April 15 tax filing deadline to set aside your 2016 contributions. The only reason to delay is if your employer offers a 401(k) or SIMPLE-IRA plan at work; it’s smart to first contribute enough to your employee retirement plan to receive the full employer match before making an IRA contribution. Also, as you probably know, a Roth IRA is normally tax-free.

B. Invest in Tax-free Securities. Tax-exempt securities, owned outright or through a mutual fund, is an obvious source of tax-free income. Whether or not these provide a better return than the after-tax return on taxable investments depends on several factors such as your tax bracket and the interest rates. Since these factors change frequently, it’s a good idea to compare taxable and tax-exempt investments periodically.

C. Consider Making Charitable Donations from Your IRAs to Save on Your Taxes. If you’ve reached age 70½, up to $100,000 of taxable IRA money can be paid directly to your specified tax-exempt charities. Known as Qualified Charitable Distributions (QCDs), they are federal income tax-free to you. You aren’t allowed to claim any itemized deductions on your Form 1040 but the tax-free treatment provides a 100% write-off. The benefit to you is that you can count this charitable distribution as part of your legally required annual minimum distribution which you’d otherwise be forced to receive and pay taxes on in that year. To qualify for this special tax break, the funds must go directly between your IRA and the charity.

3. Use the Available Deductions to Your Best Advantage

A. Make Sure the Standard Deduction is Working at Maximum Power for You. The standard deduction rule allows you to make a deduction that is equal to the greater of either your itemized deductions, or a flat amount known as the standard deduction. Thus, itemized deductions only lower your taxable income to the standard deduction. For 2016, the standard deduction is $12,600 for married taxpayers filing joint returns. If single, the amount is $6,300 (unless you qualify as head of household, in which case it’s $9,300). If you’re at least 65, you receive an additional standard deduction of $1,250 if you’re married (plus another $1,250 if your spouse is also 65 or older), or an additional $1,550 if you’re single. In 2017, these amounts are likely to be slightly higher after an inflation adjustment.

If your total itemized deductions are close to whichever standard deduction applies to you, you may be able to leverage an additional benefit by “bunching” your deductions every other year. In this manner, you can time your itemized deductions so they are high in one year and low in the next, claiming actual expenses in the year they are bunched and taking the standard deduction in the intervening year. (Examples of deductions you might shift include charitable contributions, and state and local income and property taxes.)

B. Increase Your Participation in “Passive Activities”. The passive activity rules prevent many taxpayers from deducting losses from business activities in which they do not “materially participate”. These losses are from partnerships in which the taxpayer is not personally involved or does not participate to the extent required by the tax rules. However, taxpayers can satisfy any one of several tests (e.g., spending more than 500 hours per year in day-to-day operations) to meet the material participation standard. If you’re expecting a current-year loss from an activity or are carrying a loss from a prior year, with proper planning between now and year-end, you may be able to increase your involvement and deduct some of the losses, lowering your tax responsibility.

4. Carefully Review Your Business Deductions

A. Take Advantage of Section 179’s Deduction. Under Section 179, an eligible business can often claim first-year depreciation for the entire cost of new and used equipment, software additions, and eligible real property costs, like vehicles. Aside from Section 179, your business can also claim first-year depreciation equal to 50% of the cost of most new equipment and software placed in service by year-end.

B. Sell the Business Vehicles, Don’t Trade Them In. Tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. When it’s time to replace a vehicle, it’s not unusual for its tax basis to be higher than its value. Should you trade-in the vehicle, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one. However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss.

C. Employ Your Child. If you are self-employed, you might want to consider employing your child to work in the business. Income shifts from you to your child, who is in a lower tax bracket and who may avoid tax entirely due to your child’s standard deduction. There can also be payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from Social Security, Medicare, and federal unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. Children with IRAs, particularly Roth IRAs, have a great start on retirement savings since the compounded growth of the funds over many years can be significant. Remember that wages must be reasonable given the child’s age and work skills, and if the child is in college or entering soon, too much earned income can negatively impact the student’s financial aid eligibility.

D. Establish a Retirement Plan for Your Business. If your business doesn’t offer a retirement plan, now might be the time to benefit from one. Current retirement plan rules allow significant deductible contributions. Even if your business is only part-time or something you do on the side, contributing to a SEP-IRA or SIMPLE-IRA can enable you to reduce your current tax load while increasing your retirement savings. With a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum annual contribution of $53,000. A SIMPLE-IRA, on the other hand, allows you to set aside up to $12,500 plus an employer match that could potentially be the same amount. In addition, if you’re age 50 or older by year-end, you can contribute an additional $3,000 to a SIMPLE-IRA.

5. Also Consider Estate Planning to Save Taxes

The estate tax is a tax levied on an estate being transferred from the deceased to a beneficiary. Estate taxes can be severe, consuming as much as 49% of the estate’s value, or even higher with the tax your estate might have to pay from a combination of federal tax and the state estate tax levied by some states.

Your estate’s taxation can be influenced by various factors, among which are divorced partners, minor children, and below-market loans to family members. These are all excellent reasons to use a team of professionals who are trained to minimize the burden of your estate’s taxation.

The unified federal gift and estate tax exemption is a generous $5.45 million in 2016, and the federal estate tax rate is a historically reasonable 40%. Even if you already have an estate plan, it’s possible it may need updating to reflect the newest changes to current estate and gift tax rules.


Tax planning is an important but complicated task requiring a thorough analysis of your unique financial circumstances, or you could be paying too much in taxes and sacrificing too much of your hard-earned wealth. With the changes approved by Congress in late 2015 that made the long-favored tax breaks permanent, taxpayers can finally determine the impact of these tax provisions on their long-term financial and business planning decisions. For 2016, the top federal income tax rate is 39.6%, but higher-income individuals may also have to pay the 0.9% additional Medicare tax on wages and self-employment income and the 3.8% Net Investment Income Tax (NITT), which can both result in a higher marginal federal income tax rate.

The point is that tax laws remain staggeringly complicated and now, at mid-year, is the perfect time to enjoy the support of trained professionals who will review your situation in detail to see how the tax-reducing strategies mentioned in this report, as well as many other tax reduction ideas, can be used to save your money.

The summer is a great time to assess where you are and where you want to be. Evaluate your tax situation, set a plan, and implement strategic adjustments between now and year-end that preserve your wealth.