Thursday, April 10, 2014

Two Ways to Cut Investment-Related Taxes

We are in the thick of tax season and some of you who have completed your returns may have realized that your investment-related taxes went up last year. Most Americans are much more reactive than proactive when it comes to effective tax planning. There are various strategies you can deploy to minimize your investment-related taxes and here are two of my ideas to consider.

The $250,000 adjusted gross income (AGI) for married couples ($200,000 single) is an extremely important threshold to watch because it triggers the 3.8% Medicare surtax on ‘net investment income’. This applies to taxable interest, taxable dividends, net taxable capital gains on investments, and net income from a rental property. Since it is early in the year, you will want to consider strategies that may keep your income below these levels if you are floating around the threshold. Considerations include maxing out 401(k), using a deferred compensation plan if your company offers one, waiting on exercising stock options, health savings accounts and flexible spending accounts. This is not an end-all-be-all list, but a good place to start. Remember, the difference between a 15% capital gain tax and capital gain 18.8% tax isn’t 3.8%. It’s over 25%!
Another option that many investors miss out on is matching up their capital gains and losses within their brokerage accounts toward the end of the year. Remember, if you have carried forward capital-gain losses from a prior tax year then you can sell positions that have gains essentially at a zero tax rate. At a minimum, if you have a fair amount of positive capital gains in 2014, just look for loss positions to at least wipe out some of the liability.