Tax-Efficient Investing

When it comes to taxes, the old adage remains true: “It’s not about how much you make, it’s about how much you keep.” Investment strategies should not be based solely on taxes, but investors should consider any opportunities to defer, manage, reduce or avoid additional taxes.

1. Defer Taxes. The largest tax benefit available to most investors is the ability to defer taxes through retirement accounts, such as 401(k)s, 403(b)s, IRAs and taxdeferred annuities. When using a traditional retirement account, you receive the benefit of reducing your current taxable income while also deferring taxes on any investment growth within the account(s). Investors should consider locating and holding investments that generate certain types of taxable distributions within a tax-deferred account rather than a taxable account. In doing so, you will be maximizing the tax treatment of those accounts. 2. Manage Taxes. Decisions you make about when to buy and sell investments you own can affect your tax burden. While you should never “let the tax tail wag the investment dog”, certain concepts should be incorporated into your portfolio management style. As an example, a loss on the sale of a security can be used to offset any realized investment gains. In addition, $3,000 of unused capital losses can be deducted against taxable earned income and certain other income per year. If your losses exceed the limits for deductions in the year they occur, the tax losses can be carried forward to offset investment gains in future years. As another example, being aware of holding periods is an intelligent way to avoid paying higher tax rates. Securities held more than 12 months are taxed as long-term capital gains or losses with a top federal rate of 20% in 2022, which can be more advantageous than recognizing a short-term capital gain which would be taxed as ordinary income. 3. Reduce Taxes. There are various investment-related charitable giving strategies you can employ to reduce your tax burden while also supporting charities and those in need. These strategies include, but are not limited to the following: a. By donating long-term appreciated securities to a charity, you can avoid paying capital gains tax on the appreciation while also claiming the fair market value of the security as an itemized deduction on your federal income tax return, up to 30% of your adjusted gross income. b. If you are at least 72 and have an IRA, you can transfer up to $100,000 annually per taxpayer directly from your IRA to a charity by making a qualified charitable distribution (QCD), which can be used to satisfy your required minimum distribution requirement while also lowering your taxable income.

4. Avoid Additional Taxes (Beware the Acronyms). While it’s not always possible to avoid additional taxes, proper tax planning can help reduce the tax burden caused by additional taxes on higher income or investment earnings. Three examples of these are the NIIT, AMT and IRMAA. a. Net Investment Income Tax (NIIT) is an additional 3.8% tax on the lesser of an individual’s net investment income or the excess of modified adjusted gross income over the following amounts for 2022: • $250,000 for married filing jointly or qualifying widow(er) • $125,000 for married filing separately • $200,000 in all other cases b. Alternative Minimum Tax (AMT) creates a floor for some taxpayers to pay a minimum income tax despite deductions or credits they may otherwise qualify for. It requires some taxpayers to calculate their tax liability twice, once under the regular tax rules and once under the AMT rules, and pay the higher amount. There are exemptions and phaseouts for the AMT, as well as different AMT rates, that are indexed, or change, each year. c. Income-Related Monthly Adjustment Amount (IRMAA), while technically not a tax, is an additional amount, or surcharge, some individuals may pay on the Medicare Parts B and D if their incomes are above certain thresholds. The income that is used to calculate one’s IRMAA is from two years prior. So, for 2022 these thresholds start at 2020 incomes above $91,000 for individuals and $182,000 for a married filing jointly couple. There is a process to appeal the surcharge if you have had a qualifying life event that would reduce your income, but it must be done within 120 days of receiving the IRMAA notice. The appeal application is IRS Form SSA-44. Proper tax and financial planning must be done to ensure any proactive tax planning is in your best interest. We recommend that you work with your tax and financial advisors before implementing any significant financial or tax decisions.

“I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” — Warren Buffett