Written by Scott Bishop, MBA, CPA/PFS, CFP® | Saturday, August 3rd, 2019
As many of you know, I enjoy providing helpful tips for our newsletter and website. I was on an AICPA Webinar hosted by Robert Keebler, CPA/PFS and he shared some great tax planning ideas for 2019. Given that the Tax Cuts and Jobs Act of 2017 has some sections that are permanent and some that are temporary, I agree with Bob that these are some great ideas that you should discuss with your tax and financial planning team.
Bracket Management: Timing of income, deductions, retirement plan contributions, investment selections, charitable gifts, etc., to avoid higher tax brackets and the net investment income tax (NIIT).
3.8% NIIT & IRC 199A Limits: Engaging in various strategies to reduce net investment income or taxable income; i.e., municipal bonds, tax-deferred annuities, life insurance, oil & gas investments, choice of accounting year for estate/trust, or timing of estate/trust distributions.
Income Shifting: Outright gifts to children, LLC and partnership gifts, gifts to non-grantor trusts for family, QSSTs, distributions from existing trusts, or conversions of grantor trusts to non-grantor trusts to shift income, thereby avoiding the higher tax brackets, NITT, & 199A limits for pass-through businesses.
ROTH IRA Conversions: Converting traditional IRAs into ROTH IRAs in order to lower MAGI below the applicable threshold amount in future years, thereby avoiding NIIT.
Charitable Remainder Trusts: Three types of CRTs: Substantial Sale CRT, Retirement CRT, and Income Shifting CRT. Used to harbor net investment income in a tax-exempt environment while at the same time leveling income over a longer period of time, deferring income until after retirement, or shifting income to family members in order to keep MAGI below the applicable threshold, thereby avoiding NIIT.
Maximum Contributions to Retirement Plans: Especially for Small Businesses, Contributing to retirement plans in order to lower MAGI below the applicable threshold amount, thereby avoiding NIIT.
IRC & 453 Deferred Installment Sale: Used to level net investment income over a longer period of time in order to keep MAGI below the applicable threshold amount, thereby avoiding the NIIT.
Tax Efficient Investing: When designing a portfolio that is coordinated with your tax and financial plan, you should consider the following: 1) increasing investments in tax-favored assets; 2) deferring gain recognition; 3) changing portfolio construction; 4) after-tax asset allocation; 5) tax-sensitive asset location; 6) managing income, gains, losses, and tax brackets from year to year; and 7) managing capital asset holding periods.
Charitable Lead Trusts: These CLT’s can be used to offset net investment income against charitable deductions dollar-for-dollar in a tax-efficient manner, thereby avoiding the NIIT.
Investment in Low Risk Oil and Gas Partnerships: Although they can be risky (“dry holes”), investing in oil and gas partnerships to create a larger deduction in the current year in order to lower MAGI below the applicable threshold, thereby avoiding the NIIT.
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