Insights for Investors: Thinking About Taxes

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By Maurice Stouse, Financial Advisor and Branch Manager

Maurice Stouse

When it comes to saving and investing, we encourage individuals to do a review of tax strategies and to consider if some of these might work for you and your situation.

There is tax deferral, tax deduction, tax free, tax reduction and tax loss harvesting that stand out for many people not only at this time of year, but throughout your saving and investing career.

Tax deferral. Those are mainly retirement savings plans like IRAs or 401ks where contributions may lower taxes (tax reduction) and those contributions, and any employer matches grow tax deferred. In other words, you might pay a little less tax now and your assets could compound without current taxation and potentially grow faster or compound more quickly.

Tax deduction. There might be a lot to choose from here. Tax deductions might come (if you itemize on your tax return) from charitable contributions, mortgage interest, deductions for your business, certain qualified medical expenses. Note that the tax reform in 2017 raised the standard deduction so your potential deductions would need to exceed that amount to count. There are also deductions available for certain electric vehicle purchases as well. Charitable contributions come in play as individuals can support causes, churches, or schools and perhaps have a deduction. It is important to note that while at certain levels charitable contributions may no longer be deductible, Americans remain just as generous as ever.

Tax free. This is mainly regarding those investments that generate tax free income. Municipal bonds are the most common tax-free investment known to most people. States and municipalities issue bonds for schools, roads, hospitals, and other public projects. The purchaser in turn earns income from these obligations that is federally tax free and if you buy a bond issued in a state where you also pay state income tax, you will avoid that as well. Bonds, when held to maturity pay the investor back at that point and they benefit from the tax-free income in between. Muni bonds are generally considered second in credit worthiness to national or U.S. Treasury debt. They are conservative investments that help diversify a portfolio and earn tax free income.

Tax free might also mean tax free distributions from a Roth IRA. A Roth IRA is an individual retirement savings account that does not provide a tax deduction however the principal and growth are tax free, forever. So, if someone were to invest in these after-tax accounts for a long period of time, that growth will never be taxed. Not everyone qualifies for a ROTH IRA, but everyone should look to see if they qualify for this tax-free investing. Investors and savers should learn the rules to qualify, the limitations that apply and become familiar with penalties that might apply if withdrawals are done prematurely.

529 plans, for education, while contributions are not deductible the investments grow tax free if they are used within the rules that apply toward these plans.

Tax reduction. There are a few strategies investors might want to learn more about. One is for retirees making withdrawals from their retirement accounts (perhaps on a mandatory basis). Here they can combine charitable giving with their retirement account distributions. Someone could, for example designate a portion of their distribution to go to (there are limitations that apply) a charity of their choice. The effect is that they lower the amount of income that distribution generates and therefore reduce the taxes they owe for that year of the withdrawal. Some retirees might also want to explore what this strategy (when done annually) might to lower their Medicare premiums. Certain rules apply so those individuals should review that thoroughly.

Tax loss harvesting. This is a strategy that has been utilized by many people over the years. Some investors do this consistently or systematically to lower their capital gains taxes. The idea is to annually or periodically “harvest” losses in an investment portfolio (a taxable portfolio vs a retirement portfolio for example). An investor would select certain investments that have a loss and to sell those (and take note there is a wash sale rule that applies if someone buys the same investment back too quickly) and bank or harvest that loss. These losses never expire but rather when they have been used, only then do they run out. An investor may sell certain stocks or assets that are down and wait to apply that loss to another asset they have sold at a gain. The harvested loss is deducted from the gain and hence tax reduction. Over time, this strategy, many experts note, could add a few extra percentage points to their return over time.

Lastly, we note that income in retirement can affect the taxation of Social Security income. There are two types of income that would not have to count towards that end: Distributions from ROTH IRAs and income from whole life insurance (when withdrawn). So, these two types of investments ultimately serve as tax reducers in those circumstances.

Diversification and asset allocation does not ensure a profit or protect against a loss. Holding investments for the long term does not ensure a profitable outcome.

Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management/ Raymond James.  Main office located at The First Bank, 2000 98 Palms Blvd, Destin, FL 32451. Phone 850.654.8124. Raymond James advisors do not offer -tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. The First Wealth Management and The First Bank are not registered broker/dealers and are independent of Raymond James Financial Services.

Views expressed are the current opinion of the author and are subject to change without notice. The information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.

There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. To learn more about these risks and the suitability of these bonds for you, please contact our office.