Investments and Tax Planning: They Go Hand-in-Hand

When it comes to investments, tax planning should play a major role.

Many changes to the tax code at the beginning of 2013 affects investors, which is why how and when you invest can significantly alter your tax bill. At the start of 2013, the capital gains tax rate rose to 20% from 15%. The addition of the Affordable Care Act Surtax of 3.8% increases the amount of capital gains tax on incomes greater than $200,000 to 23.8%. The increase to the maximum ordinary income tax rate to 39.6% affects most investors.

Waiting until the end of the year to address any tax issues could result in paying more in taxes to Uncle Sam come April 15. It is better to create an investing plan that takes taxes into consideration early in the year and update that plan in response to changing market conditions and tax law.

“The market may have moved against them and there is a much smaller window of time to create a strategy to minimize tax liabilities," warns Robert Weiss, global head of J.P. Morgan Private Bank’s Advice Lab

But Congress makes planning hard as it has gotten in the habit of not acting on pending tax issues until the final bell has sounded for the year. It is then that we are visited with new laws retroactive to the beginning of the year.  This could put a monkey wrench in tax planning, but Weiss advises people to work with whatever level of certainty available.

“…create a pro forma that encompasses existing alternative minimum tax, capital gain tax, capital loss treatments, and regular income tax.”

To get your taxes in order, it’s a good idea to have a solid foundation then work with potential contingencies to determine your course.  Here’s where to start:

Retirement Planning

Tax planning should also encompass retirement issues and the deferral aspects of retirement plans. For 2014, you can tuck away $17,500 if under age 50 and $23,000 if 50 and over into a 401(k) plan tax free. This move reduces your taxable income and can lower your tax bill.

Where you live in retirement plays a major role in determining how much you pay in taxes. If you retire to a high tax jurisdiction, such as New York or California, you may wish to consider a ROTH IRA plan, the distributions of which are not taxable.

Track Deductions

Maximizing the impact of deductions is another tax planning tool. For example, if you are subject to the alternative minimum tax (AMT), you should know that there are certain deductions, such as state income tax, excess medical, and property taxes that are not deductible for AMT purposes. It may be more beneficial to defer these deductions to another tax year.  This requires professional analysis to determine the best route.

Another potentially overlooked deduction is the interest cost for mortgages.  If a homeowner has a mortgage greater than $1.1 million, any interest on the portion of the loan above that amount may not be deductible.

Because tax law is so complex and every taxpayer’s situation is unique, it’s important to be savvy about tax laws but equally important to create a plan with a qualified tax professional and a qualified investment advisor to determine the course suitable for your particular needs.