As part of our continued efforts to stay abreast of the latest financial planning strategies on your behalf, I spent two hours yesterday in an excellent briefing on tax reduction planning. While some folks may not relish two hours on tax reduction planning, the time flew by for me!
A key area of planning for our clients includes strategies to reduce tax on capital gains (the tax paid on sales of appreciated investments). Yes, we want gains, but once achieved, Uncle Sam and the other taxing authorities also like a “piece of the action.”
That said, there are many ways to minimize tax on gains and we’ll continue to apply these on your behalf. With the right strategies, a client may pay a federal tax on capital gains that are lower than the client’s normal income tax rate, for example 15% on capital gains vs. a normal income tax rate of 25%.
Some key strategies include:
- If one is charitably inclined, making gifts of appreciated investments (read: funds or stocks with big gains) to charities rather than donating by cash or check. If done correctly, both you and the charity avoid paying capital tax on the gain. This is a much more tax efficient way to give versus “writing a check” comprised of monies that have already been taxed. Many folks use “donor-advised funds” for this purpose – about half of our clients leverage this type of tool.
- Creating tax-free gains by contributing to a Roth IRA or educational 529 Plan since earnings in these vehicles grow tax free (certain restrictions apply.)
- Deferring gains to a lower tax year via contributions to work retirement plan, or a personal 401(k), IRA, Simple IRA, etc.
Of course, as many of you have experienced, we work closely with our client’s CPA or tax advisor in this planning. The tax rules are complex, and collaboration on the right topics among our client’s trusted advisors can add value.
Laura, the founder of LWP, is a Senior Wealth Manager, Chief Investment Officer and Shareholder. She has a master’s degree in tax and is an excellent listener. While she is a sophisticated financial planner with experience in complex issues, her priority is ensuring a financial plan works for people.
