Tax Busters for Investment Advisors

  • With this guide, an investment advisor  (or an investor) can save thousands of dollars. For example, you can double your after-tax return by using “qualified dividends” from domestic companies. See “Qualified Dividends below. Let check out the opportunities.
  • Is your hobby a business? Is it profit-seeking? If it is you can deduct business deductions, like auto, home office, and travel. As business deductions, they can save you money even if you cannot take them as itemized deductions.
  • Retirement accounts. Your business may allow you to contribute to a SEP and a SEP is not subject to age limits. You can contribute to 401(k)’s, 403(b)s, and IRAs are deductible so you can postpone your taxes and accumulate tax-free until you withdraw them. Roth IRAs or 401ks. Contributions to Roth IRAs do not give you an immediate tax break, since they are not deductible, but you do not pay taxes when you withdraw the money. Income and investment gains in Roth accounts are tax-deferred. Strategy: Decide whether you need a tax advantage more now or later.
  • Exchange that life insurance contract for a long-term-care policy you do need, tax free.Also tax free is the swap of an annuity contract or a long-term-care policy.
  • Long Term Capital gains (on sales of investments held 12 months or more) are taxed at much lower rates than ordinary income. For example, if you file a joint return with taxable income of $80,799 the rate is 0%! . Gains held for a shorter period can be taxed at up to 40.8%!
  • Pick the stock with the least gains. IRS rules allow you to specify which stocks you sell.
  • Capital Losses can offset 100% of your capital gains. You can use excess capital losses to offset up to $3,000 of other taxable income. You can carry remaining losses forward. Strategy: When you sell, pick those that cost the most.
  • “Qualified dividends” are those from domestic US companies. Qualified dividends are taxed at lower rates, just like long-term capital gains. Strategy: Be aware of the tax advantages of domestic stocks when you select investments.
  • A 3.8% Surtax on net investment income tax applies to the excess of net investment income over “MAGI” (adjusted gross income with some reductions) exceeding $250,000 for joint filers, $125,000 for married separate filers and $200,000 for other taxpayers. Investment income includes interest, dividends, capital gains, annuities, royalties, and passive rental income. Strategy: Sell in years with lower income.
  • Net investment interest. If you deduct itemized deductions on Schedule A you can deduct NII, up to the amount of net investment income. NII includes margin interest or interest on a loan to purchase an investment partnership, S corporation, LLC or corporation. Strategy: If you know how, you can increase this deduction by increasing net investment income with long term capital gain or qualified dividends.
  • Avoid gain on appreciated stock. If you contribute appreciated stock that you held it at least 12 months, you can deduct its full fair market value, yet the appreciation is not taxable.
  • Donor-advised funds. You can make a large donation to a DAV toward year end and deduct it immediately, while the fund contributes to charities you choose over a period of time. In a high-income year use this to benefit from more than a year’s deductions.
  • Senior tax-free contributions from IRA to charity. After age 70½, you can make donations directly from your IRA to charities. These are called “qualified charitable distributions” (QCDs). There is a $100,000 limit on QCDs per year, per spouse, to one’s IRA. QCD’s save taxes in several ways. (1) There is no federal income tax on the withdrawal even though you do not claim itemized deductions. (2) The QCD does not increase adjusted gross income, so it does not increase taxable Social Security benefits or investment income hit by the 3.8% surtax. (3) A QCD taken from a traditional IRA count as a required minimum distribution (RMD) on which you would otherwise pay taxes. The limits on these qualifies for a cost of living increase.
  • The BIGGEST Tax Buster for large contributions. A Charitable Remainder Unitrust (CRUT) is a tax-exempt trust for contributions of appreciated investments, which would produce a lot of capital gain if sold. If instead, you contribute your investments to a tax-exempt CRUT, it can sell them tax-free and reinvest their full value tax free. The CRUT can provide you income for your lifetime and thereafter distribute its assets to a charity of your choice. You get an immediate deduction for the present value of the contribution.
  • A CRUT can make a great retirement vehicle.
  • For donations of $15,000 or more,  the Community Foundation of Memphis can provide smaller versions of CRUT’s, “donor-advised funds” and more which give you some say so as to investments and charities to benefit and more.

About Wis Laughlin

I help clients with tax preparation and IRS representation, estate planning, and complex contracts, including LLC's. As a former IRS tax attorney in their National Office. picked Wis in 2017 and several prior years as one of the Top Tax and Estate Lawyers in Tennessee. I am your advocate, not your accountant. I don't tell you what you can't do. I show you how to do it.
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