Everyone wants to be the guy who earns a sizeable income… until the tax bill arrives! Where taxes are concerned, those in the top income brackets certainly aren’t in an enviable position. For example, those who earn more than $400,000 per year (or $450,000 for married couples filing a joint return) pay federal income tax at 39.6 percent of their earnings.
Ouch! Who wants to pay up to 40 percent of their income in taxes? Luckily, there are ways to manage your tax burden, no matter where you fall in the income brackets. Income is taxed after deductions are taken, so investigate all of the available methods of reducing taxable income, such as the following ideas.
A tax-deferred or tax-free account can help. If you pay high taxes on investments, moving some of them to a special tax-free or tax-deferred account might help.
…but don’t jump to conclusions. Sometimes, moving the right investments to taxable accounts is the better idea. For example,income from municipal bonds is currently exempt from income taxes, so putting those in a taxable account might be wise. Passively-managed investments can often be quite tax efficient, and might be a good choice to hold in a taxable account. You can’t avoid taxes entirely, so the best strategy is to analyze whether it is better to pay them now or pay them later when you retire.
Watch out for long-term capital gains. If you’ve held an investment (including property) for more than a year, selling it at a profit will trigger long-term capital gains taxes at a 20 percent rate. Since short-term gains are taxed at a lower rate, keep that information in mind as you decide when to sell your investments. Occasionally it is even wise to take a small loss to offset high capital gains taxes.
Work with a financial advisor. Many investment and tax maneuvers must be carefully planned in advance, in order to be effective. Work with us on a regular basis so that we can help you make the best decisions now, and anticipate your needs in the future. If you’re worried about your tax burden next spring, give us a call now so that we can put together a plan of action.
Portions of this article have been excerpted from “Five Strategies for High Income Earners to Deal with the New Tax Rules” by Rick Rodgers, who not affiliated with LPL Financial.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.