Strategies to Reduce Taxes

Taxes are one thing retirees tend to have a little control over, as long as they do deliberate tax planning.

Accumulating sufficient assets for retirement is a critical part of retirement income planning, according to Bill Thomas, Financial Adviser, Thomas Financial Services. However, it’s just as important to preserve what you’ve saved over the 25 or 30 years that you may live in retirement. That’s where deliberate tax planning comes in.

It is likely that taxes will increase during your retirement, potentially reducing your income and cash flow. Instead of fretting over increasing taxes, now is the time to figure out how to create a tax-efficient retirement where you can maximize deductions and credits while minimizing taxes.

Getting into the 0% tax bracket may be possible and easier than you think. All it takes is a smart tax strategy that allows combining tax credits and deductions, accumulating more long-term capital gains, or benefiting from qualified dividends.

You can legally decrease or completely eliminate your tax bill by taking advantage of some of the perks in the tax code.

Qualified dividends follow three rules:

The dividend must have been paid by a U.S. corporation or a qualifying foreign company. The dividends must be deemed as qualified in the eyes of the IRS and cannot be listed as a non- qualified dividend.
You’ve held the stock paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
Use the long-term capital gains rates shown above to see the taxable income and filing status for the 0% tax brackets.

Being an investor requires a strategy to reduce your taxes. For many, it’s tempting to buy stocks and sell them as soon as the price shoots up. But if you hold on to your investments for an over a year — you’ll be eligible for long-term capital gains tax rates.

Simply put, it pays to be patient in the stock market. If you sell a stock that you’ve owned for a year or less, you’ll have to pay a short-term capital gains tax, which can be as high as 37%. Once you’ve held an investment over the one-year mark, you’ve hit the long-term capital gains threshold.

Getting into the 0% tax bracket may be easier than you think. All it takes is a smart strategy that allows you to combine tax credits and deductions, accumulate more long-term capital gains, or benefit from qualified dividends.

Make tax-smart investing part of your tax planning

The potential impact of tax-smart investing techniques over time. As the accompanying graphic shows, employing tax-smart investing techniques over time may have a significant impact on your long-term returns. The longer you apply these techniques, the greater the potential impact.

Each line represents a client’s hypothetical value from tax-smart investing techniques at various starting dates, based on a starting portfolio value of $1 million.

Though taxes might not be the first thing you think of when it comes to how you want to spend money in retirement, planning strategically can mean more income and cash flow for the things you love.

References:

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