After another successful (and hectic) tax season, here are a few things we learned that can help you reduce your taxes for next year.
Keep Your Broker on a Short Leash
We saw many 1099s from brokerage firms that reflected a high volume of trading activity; this type of trading not only generates taxable short-term capital gains, but also generates fees and commissions paid to the broker. This is one reason why you are not seeing substantial gains even though the S&P 500 is up nearly 200% since March of 2009.
Manage the taxation of your Social Security
The other problem we see from brokerage accounts is the adverse effect they can have on the taxation of your social security. Remember, capital gains income, dividend income, tax-free municipal bond income, rental income and W2 income can all cause up to 85% of your social security to be taxed. Additionally, IRA income can increase the premiums you pay for Medicare.
IRA Distributions Can Be Disastrous
Taking retirement income from an IRA can cause multiple tax problems for retirement income. First, IRA distributions are fully taxed as ordinary income. This means after state and federal tax, your IRA may be worth 20-40% less than you think it’s worth. Second, at age 70 1/2 the IRS requires you to take required minimum distributions from your IRAs. These distributions may be income you do not want or need and can change the structure of your retirement tax plan.
Medical Receipts Matter
Many people do not keep records of their medical expenses because they do not have enough to deduct them from their federal tax returns. However, you can deduct those costs on your Arizona state tax return. Save receipts for every medical expense you incur including the miles driven to and from the doctor.
Consider a Roth IRA Conversion
Tax-Free Roth IRA distributions do not adversely affect your social security or medicare, and best of all have no required minimum distributions at age 70 1/2. Our accountants will work with you to develop a plan to systematically convert your taxable traditional IRA into a Tax-Free Roth. We use a proprietary tax modeling system to determine the optimal amount to convert while keeping you under the next tax threshold. This will ensure a minimum amount of tax is paid.
Request a consultation to better help plan for taxes next year and to see if a Tax-Free Roth Conversion is the right choice for you.
Marc Montini has 20 years of experience in financial services.