Tax Planning

As part of our continued efforts to stay abreast of the latest financial planning strategies on your behalf, I spent two hours yesterday in an excellent briefing on tax reduction planning. While some folks may not relish two hours on tax reduction planning, the time flew by for me!

A key area of planning for our clients includes strategies to reduce tax on capital gains (the tax paid on sales of appreciated investments). Yes, we want gains, but once achieved, Uncle Sam and the other taxing authorities also like a “piece of the action.” That said, there are many ways to minimize tax on gains and we’ll continue to apply these on your behalf. Some key strategies include:

  • With the right strategies, a client may pay a federal tax on capital gains that are lower than the client’s normal income tax rate, for example 15% on capital gains vs. a normal income tax rate of 25%.

  • If one is charitably inclined, making gifts of appreciated investments (read: funds or stocks with big gains) to charities rather than donating by cash or check. If done correctly, both you and the charity avoid paying capital tax on the gain. This is a much more tax efficient way to give versus “writing a check” comprised of monies that have already been taxed. Many folks use “donor-advised funds” for this purpose – about half of our clients leverage this type of tool.

  • Creating tax-free gains by contributing to a Roth IRA or educational 529 Plan since earnings in these vehicles grow tax free (certain restrictionsapply.)

  • Deferring gains to a lower tax year via contributions to work retirement plan, or a personal 401(k), IRA, Simple IRA,etc.

Of course, as many of you have experienced, we work closely with our client’s CPA or tax advisor in this planning. The tax rules are complex, and collaboration on the right topics among our client’s trusted advisors can add value.

An Investment Update

While U.S. and international equity markets have largely rebounded from the Greek and Chinese crises, we are cognizant that we’ve gone four years without an “official market correction” in the U.S. equity markets. If history is any indication, this an unusually long time period. Note that corrections are not a bear market. Instead, they generally are a downturn of approximately -10%, followed by a rebound overtime.

Jeff Saut, Raymond James Investment Strategist, talks about “Bad Breath,” a play on “Bad Breadth.” Bad, (or lack of) breadth seeks to share that only a few stocks have been going up a lot lately (hello Apple), and while sometimes contributing to a gain within their respective sectors, might be a sign that the U.S. equity market does not have broad upward energy.

The above said, we do not see the “clouds of recession” (which could drive a bear market) on the horizon.

As always, please let us know your questions and comments – we appreciate hearing from you.