Improve Your Portfolio’s Tax Efficiency
To get a sense of your annual tax liability and take steps to add more tax-efficient investments, review your portfolio’s turnover ratio (the percentage of your holdings that have been replaced in a given year) and historical distributions. Then work with your advisor to evaluate your investments and after-tax returns. Other steps that may help to reduce taxes include tax-loss harvesting by selling securities at a loss to offset capital gains taxes and rebalancing your portfolio to include more tax-advantaged investments such as municipal bonds, especially in higher tax brackets.
Capitalize on Employer Benefits
If your employer offers a salary deferral plan like a 401(k), SIMPLE IRA, 403(b) or 457 plan, maximize your contributions to reduce your adjusted gross income and taxes over the long term. Similarly, if you’re eligible, maximize contributions to an employer supplemental employee retirement plan (SERP) to reduce your taxable income now and defer the compensation into later years when your tax rate may be lower. One often overlooked benefit is an employer health savings plan or flexible spending account. Contributions use pre-tax dollars, reducing your taxable income.
Develop a Charitable Giving Plan
Charitable giving can help mitigate your tax burden and also provide a sense of satisfaction by benefitting your favorite causes. Consider:
- Giving appreciated securities to avoid capital gains, which increase your net investment income
- Establishing a donor-advised fund to make future donations and claim the current income tax deduction
- Contributing highly appreciated assets to a charitable remainder trust (CRT) to defer recognition of income over time
While these tax planning strategies may help you to reduce Medicare taxes and your overall tax bill, don’t lose sight of your risk tolerance and long-term financial goals. If used judiciously, these strategies can help you achieve those goals, but only if deployed within the context of your overall financial picture.
The process of rebalancing may result in tax consequences. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, or state or local taxes. Profits and losses on federally tax-exempt bonds may be subject to capital gains tax treatment. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Withdrawals from qualified accounts may be subject to income taxes, and prior to age 59½ a 10% federal penalty tax may apply.
Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional.