Tuesday, October 19, 2021

Advance thinking and planning



“Let our advance worrying become advance thinking and planning.” – Winston Churchill

By Darcie Guerin – darcie.guerin@raymondjames.com

The coffee maker didn’t work, that’s why your coffee isn’t ready.” I had to laugh as I heard those words fall out of my mouth one morning when Pete returned from walking the dogs. The truth was that I had been watching “Downtown Abbey” on Netflix the night before and had forgotten to set the timer on the coffee maker. For better or for worse, I took responsibility for my actions– regardless of external circumstances–and prepared his coffee, no excuses. This same premise applies to financial matters as well.

Prior to the passage of the American Taxpayer Relief Act of 2012, there was plenty of legitimate uncertainty concerning tax matters. Now we have policies in place and know how they may affect our investments. Rather than procrastinating and blaming the coffee maker, politicians, or the stock market, let’s look at 13 timely and actionable ideas that may reduce 2013 taxes and help you obtain your financial objectives.

1. Various types of income are taxed differently. Consider rebalancing your portfolio to reduce the tax burden created by your investments and perhaps include more tax-advantaged investments such as municipal bonds or dividend paying stocks, especially if you’re in a higher tax bracket. While the tax treatment of income is important, don’t lose sight of your risk tolerance and your long-term goals.

2. Review the tax efficiency of your portfolio. The goal is to keep as much of the gain and income generated on your investments as possible. Certain investments generate more tax liability than others do. Work with your tax advisor to evaluate your investments and after-tax returns.

3. Match investments to account type. From a tax standpoint, some investments are better suited to certain account types. Traditional brokerage accounts may correspond best with tax-advantaged investments like municipal bonds or stocks held long term, while income-paying stocks may belong in tax-advantaged retirement accounts.

4. Tax-deferred growth is even more important in a high tax environment. Qualified plans, individual retirement accounts, and annuities may offer opportunities for tax-deferred growth on assets.

5. For younger investors, ROTH IRA and 401(k) conversions may be appropriate. The advantage of making the conversion now is that you pay the taxes today for a tax-free distribution later in life when you presumably could be in a higher tax bracket or taxes may have risen further. Investors should consult a tax advisor before deciding to do a conversion.

6. Deferred compensation strategies are an excellent way to defer or minimize income taxes over the long term. These plans move wages into future years when income may be less, you may have more deductions, or tax rates may be lower due to legislative changes.

7. Donor advised funds permit charitably inclined investors to reduce their tax burden and benefit favorite causes because generally speaking, donations count as itemized deductions for that tax year. This includes cash, real estate, goods, or other assets. The deductibility of gifts is based on factors such as the donors’ income, nature of the donation and the charity receiving the gift. Outright gifts may help avoid capital gains taxes. Donor advised finds allow you to make future donations and claim the current income tax deduction. Again, always consult with your tax advisor before making the gift.

8. Review cost basis information regularly to ensure accuracy and avoid paying more capital gains tax than necessary. Starting January 1, 2011, financial institutions are required to report this information directly to the Internal Revenue Service.

9. Manage short-term cash flow needs such as college tuition payments or large tax bills. Have a plan on how you’ll provide for upcoming expenses so you don’t have to sell assets at an inappropriate time.

10. Consider the advantages of your mortgage. For many investors, their home is one of their most significant assets but also one of the most illiquid assets. There is no one right answer on how to fund your home purchase, it will depend on your tax bracket, mortgage amount and interest rate. The overall limitation on itemized deductions, sometimes called the 3 percent haircut, has been reinstated, reducing the value of total allowable itemized deductions for individuals with income greater than $250,000 or joint filers with income in excess of $300,000.

11. Review estate documents, beneficiary designations, and wealth transfer strategies to make sure your intentions are properly outlined. Essential estate planning documents include a living will, power of attorney, healthcare power of attorney, revocable living trust and a last will and testament. Important life events such as births, deaths, marriage, divorce, retirement, or inheritances are often smoother if these documents are already in place.

12. Beware of the alternative minimum tax (AMT). Higher income investors may find themselves subject to this nuisance tax calculation. The 2013 AMT exemption is $51,900 for individuals and $89,800 for joint files. Factors that may influence your AMT exposure include exercising incentive stock options (ISO’s), deferment, or acceleration of deductable expenses and claiming AMT credits and refunds.

13. Work closely with your advisors to review how the new tax environment may affect your investments. Financial planning is an ongoing process that includes much more than building an investment portfolio.

There’s always a reason to postpone doing something. Yet with the American Taxpayer Relief Act of 2012 now in place, it’s time to address your financial objectives and goals making 2013 the year to review and document your financial plan. Stay focused and invest accordingly.

As federal and state tax rules are subject to frequent changes, you should consult with a qualified tax advisor prior to making any investment decision. Material obtained from sources believed to be reliable, is provided for informational purposes only, and does not constitute a recommendation. Investing involves risk and the possible loss of principal invested. Opinions expressed herein are those of the author and subject to change at any time. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame logo), which it awards to individuals who successfully complete initial and ongoing certification requirements. Diversification and strategic asset allocation do not ensure a profit or protect against a loss.

Darcie Guerin, CFP®, is Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email darcie.guerin@raymondjames.com. www.raymondjames.com/Darcie

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