How to Reduce Your Investment Taxes in 2018

How to Reduce Your Investment Taxes in 2018


According to U.S. News, the new tax plan proposed by President Donald Trump may remove the net investment income surtax, which is currently at 3.8 percent. If the surtax is eliminated, the top federal tax rate for long-term capital gains will be reduced to 20 percent for high-income earners. While the proposed tax code may provide some relief, it may not be passed. If you feel that you paid more than you should in investment taxes this year, it is not too early to start planning for your 2018 tax bill.

Harvest Investment Losses

Harvesting investment losses is something that is normally done at the end of the year, but it can be beneficial to do it at other times as well. Robert Waskiewicz from the Wescott Financial Advisory Group said that a good example of harvesting losses is selling a mutual fund that is losing money before the payment of dividends or capital gains. It is essential that you harvest investment losses in a strategic manner. If you trade frequently to lock in gains and losses, you may experience tax inefficiencies, which can in turn lead to reduced net investment return. Long-term investing should be the strategy used for taxable accounts, because it is intrinsically more tax-efficient.

Before you start to harvest investment losses, you need to calculate the amount of tax offset you can get from the sale of a certain asset. Also, take a look at the track record of the investment. Regardless of whether it is an equity or bond, you should get rid of it if it has not been performing as well as expected. If you think that the investment has a good chance of rebounding in the future, selling half of your shares is an option you may want to consider.

Locate Your Assets in the Right Places

You may have holdings that you trim back as they approach the top limit of their trading range and get back in as they fall back to their normal bottom. In order to minimize the tax friction that comes with this approach, you should locate such holdings in tax-deferred accounts. If you belong to a high tax bracket, it is a good idea to utilize municipal bonds and other investments that are not subject to federal or state income tax. Another strategy for reducing investment taxes is investing in a life insurance policy and using it as a Roth IRA alternative. If you are an angel investor, you may be eligible for federal and state tax breaks if you invest in a startup. According to investor Jason Sugarman, those who wish to remain profitable for a long time should invest in tech-oriented startups, because these startups have a better chance of surviving in the future.

Investment taxes can take a significant chunk out of your profits, but you can keep them at a minimum by following the above-mentioned strategies.

If you are Retired or retiring soon, check out these tax tips to save money now!


Ahhh, you've finally made it to retirement. It's time to relax. While sipping your morning coffee read through the below tax tips. They could save you thousands on your next tax return. 

1. Withdrawals are Coming - Get Ready

Now that you are retired most of your monthly living expenses will be coming from your savings and retirement accounts, especially if you haven't started taking social security yet. Get ready to pay taxes any of these distributions coming out of pre-tax accounts like IRAs and 401(k)s. The same goes for your taxable brokerage with the benefit of only paying capital gains taxes (rather than ordinary income) on any investments that have appreciated and you've held for over a year. This might also a great time to consider converting some of your pre-tax savings to after tax using a Roth conversion. You income most likely is a lot lower than when you were working so utilize your lowest tax brackets to get your money out now.

2. Got a Pension - Avoid the Payout Trap

If you are one of the lucky few to still have a pension by the time you retire make sure you are smart about taking a lump sum payout. The reason is because the pension company will withhold 20% of a lump sum payment (as required by the IRS). This is true even if you plan to roll the money into your IRA, which is a tax-free transaction. Not only is it a pain to have to wait until you file your taxes to get your withholding back, but because you are not rolling over a 100% of the pension, the IRS will consider this a considered a taxable distribution - triggering an immediate tax bill as well as a potential penalty. 

The right way to do this is to make sure you are doing a direct rollover to your IRA. You can't ever "touch" the money in a direct rollover so you'll need to ask your pension company to make the check out to the custodian where your IRA is held. Then no withholding is required and you avoid the payout trap. You should do this even if you intend to use some of the money right away. That way you will have the final say on whether or not you withhold any money for taxes.

3. Use your RMD as a Tax Shelter

If you are required to start taking distributions from your IRA (Required Minimum Distribution) you may want to delay it until absolutely necessary. Assuming you don't need the RMD to fund your immediate living expenses, you can wait until some time in December to actually pull the money and then withhold all the money that you need to pay your taxes when you file your tax return. Not just enough to cover the RMD but also all of your other taxable income. By doing this you are effectively getting a loan from the IRS every year. I'll explain.

The reason why this is beneficial is because typically as you earn money you are required to pay your taxes on those earnings. For example if you realized a large gain in the beginning year then you are supposed to pay an estimated tax soon after that gain occurs. If you don't you will be hit with interest and penalties for paying late. However, IRA distributions are considered paid throughout the year, even if they are made in one lump sum at the very end of the year. Therefore, if your RMD is large enough to cover all your anticipated taxes, you can keep your cash in your possession the entire year before have to pay it out to the IRS. 

4. Don't forget about the Spousal IRA

Just because you retired doesn't mean you have to stop saving in a tax efficient manner. If you are married and one of you is still employed, the non-working spouse can still contribute to an IRA. Assuming that person is over the age 55 they can contribute up to $6,500 a year to their IRA account. These spousal contributions can be done all the way up to age 70 1/2. This is a great strategy if the lower income earner retires first since you are more likely to be able to live off of the higher income earners salary. Also if you prefer to use a Roth IRA, there is no age limit. 

5. Medicare and other Medical Deductions

Many times pre-retirees transition to retirement by starting their own consulting business (or any business for that matter). Well, once you do this you can deduct your Medicare Part B and Part D, and supplemental insurance (like Medigap) premiums (or the cost of Medicare Advantage). This deduction can be taken regardless of whether you itemize or not. The reason this is such a great strategy is because if you try to deduct these premiums by itemizing your total medical expenses need to be over 10% of your AGI, which can be a large hurdle to get over. Note that until 2017, taxpayers age 65 or older only have to meet a less stringent 7.5% of AGI rule. If you are married just one spouse needs to meet this age requirement.

You cannot use this strategy if you are able to obtain insurance through an employer-subsidized health care plan, for example, retiree medical coverage. This is true for both you and your spouse's healthcare. This is true even if you don't actually use the coverage as long as it is available to you or your spouse. 

This is just the tip of the iceberg. There are many other things retirees and pre-retirees should be doing to not only optimize their tax situation but also to plan so they don't have to worry about outliving their assets and enjoy their retirement years.

Schedule a meeting today to see how you can get more confidence around retirement and taxes.

Best Investment Strategies that CUT your Tax Bill

Investments and Taxes are a lot like Pineapples, don't you think?

Investments and Taxes are a lot like Pineapples, don't you think?

As you may or may not know PJF Tax has a sister company Phillip James Financial, a wealth management company. Because of this our tax clients enjoy the benefits of expert investment advice along with quality tax advice. These two disciplines often cross paths. With that in mind our blog post this we is about the best investment strategies that can cut your tax bill. 

A mistake that most investors make is not considering how taxes effect their overall return. This includes local, state, and federal taxes and they can take a large chunk out of your investments earnings. It's very important that you have a strategy to minimize the impact of these taxes otherwise most of it will end up in the hands of the IRS, which nobody wants.

Utilize Tax Efficient Investments

The more tax efficient an investment is the higher your "After-Tax" rate or return, which is really the most important return number to look at. Think about it. If you have an investment that provides a 10% rate of return but is taxed at 50% your after tax return is only 5%. Compare that to an investment that earns 8% but is only taxes at 15%. In this case your after-tax rate of return is 6.8%. Much better than the 10% even though it didn't seem that way at first. 

There is really spectrum of tax-efficient when it comes to investments. I.e. Investment aren't just tax-efficient or tax-inefficient, they are relatively efficient. Investment A is more efficient than investment B. Get it?

Generally, investments that derive most of their return from appreciation are more tax efficient. This is because capital gains tax rates are lower than ordinary income tax rates. Keep in mind this is only the case if the investments are held long-term, meaning more than 1 year. If a capital gain is realized before one year they are taxed at ordinary income tax rates anyways. Keep this in mind when buying and selling out of your investments.

Another very tax efficient investment is municipal bonds. These bonds are more efficient because, in general, the interest earned on them is tax free at a federal level and also tax free at a state level if you happen to live in the state where the bonds were issued. Note you can buy individual municipal bonds but most investors buy them through a mutual fund or ETF (exchange traded fund). There are some state-specific muni bonds funds but they are harder to find and can be more expensive. Therefore, you might be better off buying a general muni bond fund, foregoing the state tax savings, and just taking the federal tax-free income.

Use Tax-Advantage Accounts

Just like some investments are more tax-efficient, different account types can also be more tax efficient. There are three types of tax advantage accounts, taxable, tax-deferred, and tax-free. 

Individual and Joint brokerage accounts are taxable. This is the simplest account type that you can open. There are no tax benefits which means if you sell an appreciated security you have to pay tax on the gain in that year. As well, if you earn interest or dividends you have to pay tax on that income in that year.  Usually these accounts are used after you have reached the maximum contribution for all the tax-advantaged accounts you have available to you. 

Tax-Deferred accounts are accounts that accounts allow your money to grow tax free until the money is withdrawn from the account. Examples of these type of accounts are 401(k)s, Traditional IRAs, 529 College Savings Plans and Health Savings Accounts (HSAs). Many times you will receive a tax deduction for your contributions or if the contributiosn were made through your employer through salary deferral you won't have to include that income on your tax return. 

Tax-Free accounts are Roth IRAs and Roth 401(k)s. These accounts don't provide you any immediate tax benefits but the investments grow tax-free and when they are withdrawn from the account they are not taxed.  

It is generally a good idea to hold your more tax-inefficient investments in your tax advantaged accounts (tax-deferred and tax-free). Then you tax-efficient investments can be held in your taxable accounts. This will help minimize the taxes you have to pay on your investments. 

Consider you Holding Period

As I briefly mentioned before, you should hold onto your investments for at least one year. Any gains you realize on your investments held more than a year are taxed at the beneficial long-term capital gains rates. The highest long-term capital gains rate is 20% but most people will only pay 15%. If you don't hold your investments for more than a year they are taxed at your ordinary income tax rate which could be as high as 39.5%.  So, keep this in mind if you have an investment with a large gain. It might make sense to hold on for a little longer.

Tax-Loss Harvesting

When the markets are volatile you might be able to harvest losses from your portfolio and use them to offset some gains for any given tax year. This is a strategy known as tax-loss harvesting. Here is an example of how this works. Let's say tomorrow you buy $50,000 of Mutual Fund ABC. Then over the course of a month the markets are down 10%. You have a $5,000 unrealized loss on your investment. From a tax perspective this doesn't do you any good. So you "Harvest" the loss by selling funds ABC and then purchase another fund, say XYZ at the same time. This accomplishes two things. 1) You now realized the loss which can be used on your tax return to offset any gains and 2) You maintained your exposure to the market so when it goes back up you get the benefit.

(See Tax Loss Harvesting Made Easy on the Phillip James Financial Blog)

You can also use up to $3,000 per year in losses to offset ordinary income (not just to offset gains). You can also carry forward any losses that you don't use in any given year to use in future tax years. You should also note that you cannot buy the same investment that you just sold within 30 days otherwise you violate something called the "wash sale" rule and won't be able to use those losses. 

Mutual Fund Turnover Ratios

Every mutual fund (and ETF) has a fund manager that buys and sells stocks and bonds for the fund. How often they buy or sell those funds is called the turnover ratio. A high turnover ratio means that the manager trades often. For example a 100% turnover ratio means that the portfolio will be completely different at the end of the year when compared to the beginning. I see a lot of problems with this but from a tax perspective it's going to increase your tax bill because of eh capital gains that the fund generates.

This is why we are big proponents of index funds. They are designed to track an index an index and since indexes don't change very often they have low turnover. Not to mention that most index funds beat their actively managed counterparts. It's a win/win!

Don't Sell Appreciated Securities Donate Them

When you have investments that are highly appreciated you should consider donating them to your favorite charity. This is a better idea than just donating cash because now no one has to pay the tax on the capital gains. The charity still gets the full value of the securities in the donation. This is a no-brainer than most people don't think about when writing their annual donation check. Just ask the charity you want to make a donation what their process is for handling donated securities. 

Investing is not about what you make it's about what you keep (or keep away from the IRS)! Use these strategies I laid out to trim your tax bill and keep more of your money for yourself. If you're financial advisor isn't making these suggestions maybe it's because they are not a tax professional. This is why we offer both services to our clients both Tax Preparation and planning along with Financial Planning and investments. If you want to have everything handled in one place reach out for a meeting!