RETIREMENT TIPS: Year-End Planning to Help You Lower Your Tax Bill

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AlanKondo-238x3001By ALAN KONDO, CFP, CLU

As the end of the year draws near, the last thing anyone wants to think about is taxes. However, if you are looking for ways to minimize your tax bill, there’s no better time for tax planning than before year-end.

The sooner you start, the more efficiently you can manage your 2014 tax exposure. That’s because there are a number of tax-smart strategies you can implement now that will reduce your tax bill, come April 15. With the higher rates put in place with the passage of the American Taxpayer Relief Act of 2012, being tax efficient is more important than ever.

Put Losses to Work

If you expect to realize either short- or long-term capital gains, the IRS allows you to offset these gains with capital losses. Short-term gains (gains on assets held less than a year) are taxed at ordinary income tax rates, which range from 10% to 39.6%, and can be offset with short-term losses. Long-term gains (gains on assets held longer than a year) are taxed at a top rate of 20% and can be reduced by long-term capital losses.1

To the extent that losses exceed gains, you can deduct up to $3,000 in capital losses against ordinary income on that year’s tax return and carry forward any unused losses for future years.

Given these rules, there are several actions you should consider:

Avoid short-term gains when possible, as these are taxed at higher ordinary rates. Unless you have short-term losses to offset them, try holding the assets for at least one year.

Take a good look at your portfolio before year-end and estimate your gains and losses. Some investments, such as mutual funds, incur trading gains or losses that must be reported on your tax return and are difficult to predict. Most capital gains and losses will be triggered by the sale of the asset, which you usually control.

Are there some winners that have enjoyed a run and are ripe for selling? Are there losers you would be better off liquidating? The important point is to cover as much of the gains with losses as you can, thereby minimizing your capital gains tax.

Consider taking losses before gains, since unused losses may be carried forward for use in future years, while gains must be taken in the year they are realized.

Unearned Income Tax

A new 3.8% tax on “unearned” income went into effect in 2013, effectively increasing the top rate on most long-term capital gains to 23.8%. The tax applies to “net investment income,” which includes interest, dividends, royalties, annuities, rents, and other passive activity income, among other items.

Importantly, net investment income does not include distributions from IRAs or qualified retirement plans, annuity payouts, or income from tax-exempt municipal bonds.

In general, the new tax applies to single taxpayers with a modified adjusted gross income (MAGI) of $200,000 or more and to those who are married and filing jointly with a MAGI of $250,000 or more.

What’s to Come?

While there are currently no major changes in federal tax rules planned for 2014 that have been approved by Congress, there are many steps you can take today to help lighten your tax burden. Work with a financial professional and tax advisor to see what you can do now to reduce your tax bill in April.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. You should contact your tax professional to discuss your personal situation.

1Under certain circumstances, the IRS permits you to offset long-term gains with net short-term capital losses. See IRS Publication 550, “Investment Income and Expenses,” at www.irs.gov/publications/p550/.

The opinions expressed above are solely those of Kondo Wealth Advisors, LLC, a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.

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