TAX ALPHA: Strategies and Considerations – #3 in Series
Finspire Insights
TAX ALPHA
Strategies and Considerations
by Jason Brooks, CFP®, CPA
Vice President, Private Wealth Management
Finspire, LLC
March 12, 2024
In my last piece [TAX ALPHA: Strategies and Considerations – #2 in Series] we discussed tax alpha, which again is the increased value created in an investment portfolio by using tax savings strategies. Below I have listed a few additional ideas. Keep in mind this only applies to taxable or non-retirement accounts.
BOND INCOME STRATEGY
Idea #1
Consider owning tax-exempt bonds
How to best implement: Consider implementing through direct or indirect investment products.
Result: Interest income is not taxable.
Things to be aware of: Depending on your marginal tax bracket, it may make sense to own taxable bonds over municipal bonds. Consider the tax-equivalent yield which is the pretax yield a taxable bond needs to possess for its yield to be equal to that of a tax-exempt bond.
TAX DEFERRAL STRATEGY
Idea #2
Consider owning tax deferred annuities
How to best implement: Buy an annuity with a deferral only feature.
Result: Investment income is not taxable until funds are withdrawn.
Things to be aware of: This makes sense when you are in the highest marginal tax brackets and have already maxed out your retirement plan contributions. When funds are taken out gains are taxed first, as ordinary income. Withdrawals prior to age 59.5 may be subject to a 10% penalty and federal and/or state taxes.
CHARITABLE PLANNING STRATEGIES
Idea #3
Consider gifting appreciated securities
How to best implement: Contact your favorite charity and see if they accept stocks as a donation, most do.
Result: You get to deduct the fair market value of the stock (instead of what you paid for it) thereby getting a larger deduction.
Things to be aware of: Annual limits apply to charitable deductions and the limit on donating appreciated securities is 30% of your adjusted gross income (AGI). The IRS does permit a carryover for up to 5 years should your charitable deductions exceed AGI limits in a given tax year.
Idea #4
Consider Qualified Charitable Distributions (QCDs)
How to best implement: Have your IRA custodian cut checks to your favorite charities at the time you take your annual required minimum distribution (RMD).
Result: You get to deduct the value of the contribution(s) against your RMD income.
Things to be aware of: This will allow you to get a charitable contribution deduction even if you don’t itemize your deductions. Make sure to let your CPA know if you do this as there is no tax reporting that shows a reduction on your 1099R.
As always please consult your tax advisor or financial professional before implementing any of these strategies.
Important Disclosures:
Securities offered through IFP Securities, LLC, dba Independent Financial Partners (IFP), member FINRA/SIPC. Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Advisor. IFP and Finspire, LLC are not affiliated.
The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Independent Financial Partners and Finspire do not provide legal or tax advice. Any potential tax advantages or benefits will depend on your circumstances. Consult your tax professional about your individual tax situation and visit IRS.gov to learn more. Past performance is not necessarily a guide to future results.