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5 Investment Planning Ideas for High Income Taxpayers

Brian D. Kitchen, CPA, MT Director, Tax Strategies
5 investment planning ideas for high income taxpayers

Many taxpayers noticed a significant increase in their 2013 tax liability. For most, this increase was attributable to the American Taxpayer Relief Act of 2012 (ATRA 2012). As we move into the fall season, it is time to turn our attention to year-end tax planning and think about what can be done to minimize taxes for 2014 and beyond.

The ATRA 2012 and legislation from the Affordable Care Act increased the highest federal tax bracket to 39.6 percent and the qualified dividend and capital gains tax rates to 20 percent. It also restored the itemized deduction and personal exemption phase-out and implemented a 3.8 percent surtax on investment income. With numerous indirect influences on your income tax liability, your Adjusted Gross Income (AGI) and taxable income become even more important.

Here are five investment planning strategies that can help minimize your AGI, taxable income, and future tax liabilities.

Take advantage of tax-deferred accounts

One of the most efficient investment planning techniques involves holding assets that generate taxable investment income (i.e. interest income and/or dividend income) in tax-deferred accounts, such as a 401(k) or an IRA. When a taxable account holds these assets, the income generated from the investments could be subject to a total tax rate of 43.4 percent (39.6 percent top tax rate plus 3.8 percent investment income tax). If the assets are held in a tax-deferred vehicle, the income would not currently be subject to tax.

Assets that are intended to grow are reasoned to be more efficiently held in a taxable account, since the tax will not be paid until the asset is sold. In addition, minimizing investment income will lower your AGI, which will have the ripple effect of minimizing exposure to the highest tax bracket, as well as the itemized deduction and personal exemption phase-outs.

Consider tax-exempt investments

In instances when you may need a stream of investment income in a taxable account, tax-exempt municipal bonds and federal tax-exempt mutual funds are an efficient choice. For taxpayers in the highest tax bracket and subject to the 3.8 percent surtax, the after-tax yield on taxable investments could be less than yields generated from municipal bonds.

Harvest losses

If you find yourself with large capital gains during a particular year, it is vital to review taxable investment holdings for unrealized losses. There may be opportunities to realize losses on certain assets, thus reducing capital gains for the year. This technique is often called “tax-loss harvesting” and could be an efficient choice to reduce your taxable income. A word of caution, though – the IRS is aware of this technique and has issued rules regarding “wash-sales.” It is important to discuss these rules with your investment and tax advisors.

Think about a Roth IRA conversion

There is currently an opportunity for taxpayers who are otherwise disqualified from contributing to a Roth IRA to do so through a Roth IRA conversion. The mechanics are quite simple. You contribute after-tax dollars to a traditional IRA ($5,500/$6,500 age 50 or older) and then immediately convert it to a Roth IRA. The federal tax implications should be minimal if this conversion is completed in a short period of time.

Maximize retirement contributions

Whenever possible, it is prudent to maximize contributions to individual retirement accounts and employee-sponsored retirement plans such as 401(k) plans and Simplified Employee Pension Individual Retirement Accounts (SEP-IRAs).

Investment planning can be an effective way to minimize your tax liability. These are only a few of the opportunities available. We encourage you to speak with your investment and/or tax advisors to determine the best opportunities for your circumstances.

Brian D. Kitchen can be reached at Email or 215.441.4600.


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Brian D. Kitchen, CPA, MT

Brian D. Kitchen, CPA, MT

Director, Tax Strategies

Business Tax Specialist, Individual Tax Specialist

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