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Tax Planning Ideas You Should Consider Now
Recent tax
legislation has changed many conventional tax-planning ideas. Here are seven
professional tax planning strategies you should consider today.
1. The tax benefits of a mortgage interest deduction may not be what they once
were. This has been the single largest deduction for many individuals, but
elimination of the marriage penalty and reduced marginal tax rates may reduce
its tax benefit. On the other hand, reduction of tax rates on capital gains and
dividends might make an even stronger case than ever for some high-income
individuals to borrow against their home equity to invest in a diversified
portfolio of dividend paying stocks.
2. Variable annuities, once touted as offering the best of tax deferred
investment income and insurance in one investment, may no longer be a good idea
for most individuals. High fees, exposure to surrender charges, and conversion
of capital gain and dividend income taxed at 15% to ordinary income taxed at
rates as high as 35% require a close second look at the use of variable
annuities.
3. Advantages of “529 Plans” may be lost in higher costs, complicated
restrictions, and risky "tax-traps.” The 15% tax rate on dividends and capital
gains really reduces the "tax-free" advantage of costly and restrictive 529
plans. In certain circumstances, you still might benefit from such plans--some
states offer a state tax deduction for contributions to 529 plans--but many
individuals may be better off with a conservatively managed portfolio of
dividend paying stocks held in a simple trust or custodial account.
4. The value of deferred income in a qualified retirement plan may not entirely
be what you expected. Investing in dividend paying stocks in an IRA or 401(k)
may turn income that could have been taxed currently at 15% into ordinary income
taxable at rates up to 35%, depending on your annual retirement income from all
sources. Funding your IRA or 401(k) with interest-producing securities such as
bonds or Inflation adjusted US Treasuries may make a great deal of sense since
income from these securities would have been taxed at ordinary rates anyway.
Calculating the value of retirement plan contributions requires considerable
expertise, along with complex financial modeling using computer software that
considers your current tax rate, the tax benefit of the contribution, the
assumed rate of return in the tax deferred account, and your expected tax rate
at retirement.
5. From a tax standpoint, investing in actively managed investment vehicles may
not be such a good idea, since short-term trading will produce ordinary income
to be taxed at rates as high as 35%. “Buy and Hold” is wiser advice than ever
for most individuals. It's tax-smart to consider passively managed index
products. Low costs and income taxed at the lowest possible rate make these
"tax-sensitive" investments the right choice for many investors.
6. Highly appreciated, concentrated stock positions are now less tax-costly to
liquidate. The maximum tax on capital gains on stocks is 15 percent. It’s
tempting, but risky, to hold onto highly appreciated stocks; now it's tax-smart
to sell and lock in your profits.
We can help you evaluate how recent tax legislation impacts your tax and
investment planning strategies in 2011 and beyond. We may even have a few more
money-saving or moneymaking ideas for you. If you would like our help, just call
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