A New Era in Tax Preparedness from Morgan Stanley
In recent years, we have seen a greater tendency for last-minute decisions on economic policy legislation in Washington. The American Taxpayer Relief Act (ATRA) passed at the last hour, as did debt ceiling and budget legislation, each of which directly or indirectly affected tax policy and caused uncertainly for investors. This year, however, no significant tax law changes are anticipated as of this writing, alleviating some of the uncertainty. Nonetheless, the tax cuts enacted during the Bush regime are no longer available and investors may need to be prepared for higher taxes.
Last year, the American Taxpayer Relief Act (ATRA) prevented income-tax increases for many taxpayers, although those with higher incomes were not as lucky. Adding to their higher tax burden was a Medicare surtax and a new tax on net investment income. ATRA also made permanent the elevated estate, gift, and generation skipping tax exemptions and indexed them for inflation in subsequent years. While the changes made by ATRA are “permanent,” they still may be subject to future legislative changes, which can occur in any year.
Therefore, smart tax planning is prudent in any tax environment, and there are steps you can take now as the end of the year approaches. Here are some strategies to consider now:
- With an eye to future performance, use current capital gains, as well as current and past losses, to help minimize tax exposure.
- Consider a Roth conversion, or contribute to a Roth IRA or Roth 401(k) (if offered), which can provide tax-free income in retirement.
- Max out contributions to tax-deferred accounts like 401(k)s or Traditional IRAs—subject to certain limitations, contributions can be made on a pretax basis and you do not pay income taxes on any earnings on your investments until you withdraw funds.
- Diversify your portfolio with taxable, tax-deferred and/or tax-free investments to help you strategically manage your tax exposure.
- Explore the options for gifting assets to loved ones now. Even though the estate and gift tax exemptions were made permanent and adjusted for inflation under ATRA, all taxpayers, regardless of their level of wealth, should have an estate plan in place that reflects their current end-of-life wealth transfer goals and objectives.
- Consider a securities based loan or line of credit for tax obligations. Using cash or liquidating assets could disrupt your investment strategy and trigger capital gains taxes or transaction fees. Paying your taxes with a securities based loan or line of credit is fast, easy to set up and offers competitive rates with typically no fees1 while keeping your investment portfolio intact.
Contact a Financial Advisor who can work with you and your tax professional to help determine which strategies may be best for you to help you meet your financial objectives. When you’re ready for comprehensive real estate advice and/or complete property management www.fbs-pm.com