Income tax planning includes multiple factors:
Balance is a good idea when deciding how much to contribute to retirement plans. Families with significant taxable assets (those created with after-tax dollars) have considerably more flexibility and stability when major sums are required, such as for a vacation, home remodelling, a business opportunity, or a family emergency.
Investment management for non-retirement plan accounts should always take taxes into consideration. For years dividends and capital gains subjected one to the maximum tax rates. First, capital gains were given preferential treatment, and then, within the last few years, dividends also are now eligible for favourable tax treatment. Gains and losses should be evaluated to see if “loss harvesting” can improve a portfolio while reducing taxes from the sale of appreciated assets. Mutual funds in the past have generated unexpected and undesired taxes, so care should be taken in their selection and monitoring.
Tax-free income through the use of municipal bonds sounds appealing to everyone, and for the right person and situation can be an intelligent choice. As with so many things, however, there are trade-offs here as well, and tax-free bond funds should be studied very carefully.
Tax-deferred programs are easy for financial services people to sell, and they too have much to recommend them. Compared to most other tax-advantaged programs, however, tax-deferred products (such as annuities) have significant costs and traps that can reduce their overall effectiveness in many cases.
There are investment programs that generate tax deductions or, even better, tax credits. As with anything else, there are costs and disadvantages and usually, these programs should be used only by the more sophisticated investors with qualified tax, legal, and investment guidance.
Finally, today's tax management issues are complicated by the creep of Alternative Minimum Tax (AMT). The tax code requires taxes to be computed under two formulas, the regular tax code and the AMT schedule. You must pay according to whichever system generates a higher number. Originally, AMT was created to make sure the "super wealthy” paid their fair share, but now inflation has brought millions of people into AMT in a way never intended. Both political parties talk about the importance of reforming AMT but agreeing on how to change it has been difficult.
Balance is a good idea when deciding how much to contribute to retirement plans. Families with significant taxable assets (those created with after-tax dollars) have considerably more flexibility and stability when major sums are required, such as for a vacation, home remodelling, a business opportunity, or a family emergency.
Investment management for non-retirement plan accounts should always take taxes into consideration. For years dividends and capital gains subjected one to the maximum tax rates. First, capital gains were given preferential treatment, and then, within the last few years, dividends also are now eligible for favourable tax treatment. Gains and losses should be evaluated to see if “loss harvesting” can improve a portfolio while reducing taxes from the sale of appreciated assets. Mutual funds in the past have generated unexpected and undesired taxes, so care should be taken in their selection and monitoring.
Tax-free income through the use of municipal bonds sounds appealing to everyone, and for the right person and situation can be an intelligent choice. As with so many things, however, there are trade-offs here as well, and tax-free bond funds should be studied very carefully.
Tax-deferred programs are easy for financial services people to sell, and they too have much to recommend them. Compared to most other tax-advantaged programs, however, tax-deferred products (such as annuities) have significant costs and traps that can reduce their overall effectiveness in many cases.
There are investment programs that generate tax deductions or, even better, tax credits. As with anything else, there are costs and disadvantages and usually, these programs should be used only by the more sophisticated investors with qualified tax, legal, and investment guidance.
Finally, today's tax management issues are complicated by the creep of Alternative Minimum Tax (AMT). The tax code requires taxes to be computed under two formulas, the regular tax code and the AMT schedule. You must pay according to whichever system generates a higher number. Originally, AMT was created to make sure the "super wealthy” paid their fair share, but now inflation has brought millions of people into AMT in a way never intended. Both political parties talk about the importance of reforming AMT but agreeing on how to change it has been difficult.
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