Five tax-efficient strategies for 2015
Bill Cass, February 4, 2015
With tax reform proposals from the White House and the new Congress likely to spark debate, any potential tax code changes will face close scrutiny. Today, tax-efficient planning strategies take on heightened importance.
When planning in 2015, consider these five strategies that may help investors mitigate their tax bills.
1. Invest in municipal bonds to generate tax-free income. Municipal bonds become more attractive on a relative tax basis for taxpayers who may be subject to the 3.8% surtax on investment income and who may also be subject to the highest marginal rate (39.6%). For those taxpayers, the tax equivalent yield — the yield an investor would require in a taxable bond investment to equal the yield of a comparable tax-free municipal bond — has increased.
2. Utilize strategies to reduce or avoid taxable income. There are several ways to reduce adjustable gross income (AGI), including contributing to a retirement plan or IRA, funding a flexible spending account (FSA), or deferring compensation income. Limiting AGI can prevent a taxpayer from reaching key income thresholds that may result in a higher tax bill. Maximizing the use of tax deductions such as charitable contributions or mortgage interest can also offset income. Investors also need to be mindful of certain transactions, like the sale of any highly appreciated asset, which may increase overall income above the thresholds for the 3.8% surtax, the income phaseout of itemized deductions, or the new highest marginal tax rates.