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Taxes Are Everywhere, But So Are Planning Opportunities

Wealth Advisor Bill Morgan shares some ways to implement efficient tax strategies as you work your way toward your financial goals.

Just hearing the word “taxes” can cause anxiety. After all, taxes are often among the most significant expenses you will face. However, William Morgan, a longtime CPA and a wealth advisor with Buckingham Strategic Wealth, says that along with ever-present tax obstacles comes wide-ranging opportunities to minimize the impact they have on your wealth, as you work your way toward your financial goals. Morgan shares a few ways you can implement efficient tax strategies in your comprehensive wealth management plan.

Start funding an education savings plan once you begin making plans to start a family. 529 plans have become more flexible. You can now use them to pay for kindergarten through 12th-grade tuition, and not just on college expenses. Check your home state to make sure it has updated its rules to allow K-12 withdrawals as qualified distributions. The goal of beginning to save early is now even more important.

Understand the new tax implications on purchasing a home. State and local taxes — including real estate taxes — are now capped at $10,000. Mortgage interest is limited to the amount of interest on qualified debt of $750,000. This means that buying a new home may now come with less tax savings, making it more important to understand your specific circumstance.

When making charitable contributions, consider using a donor-advised fund to lump charitable contributions in one year, then distribute the funds to charities over many years. This strategy may allow you to itemize deductions in one year and then take the standard deduction in subsequent years, enabling you to achieve a tax benefit that you otherwise might not receive.

Worrying about federal estate taxes may no longer be a concern with the individual lifetime estate tax exemption nearly doubling from $5.49 million to $11.2 million. When considering making lifetime gifts, it is critical to consider how to optimize the benefit from the step up in basis to reduce a family’s total tax bill. When someone receives an inheritance, the cost basis of the property is stepped up to the fair market value at the date of death. This eliminates any taxable gains that would have been realized if sold before death. The step up in basis on qualified inherited property, therefore, eliminates any income tax if the property is sold immediately after inheritance. Contrast this with lifetime gifts where the basis of the person making the gift now becomes the basis of the person receiving the gift.

There are great tax-planning opportunities during the years between retirement and age 70½, when required minimum distributions (RMDs) begin. You can still use Roth conversions to take advantage of lower income tax brackets in those years, but with the elimination of the ability to recharacterize or undo a Roth conversion, it’s now important to convert only the amount needed. You will need the help of your CPA and advisor to know the correct amount to convert during the year.

When you enroll in Medicare over the age of 65, Part B and D premiums are dependent on the income reported on your tax return from two years prior. Managing your gross income by reducing capital gains or minimizing RMDs helps reduce Medicare premiums. Retirees can be easily tripped up if they don’t monitor this closely.

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

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