We hope that this article finds each of you safe and healthy and ready for a great season regardless of how “normal” it may or may not end up.
Perhaps one of the most valuable lessons that we have learned over the past year and a half or so has been that we can only control what we can control. Unfortunately, it seems that the list of factors that we can’t control is getting longer rather than shorter. Conference expansion and “alliances,” the transfer portal, and vaccination rates seem to catch the headlines in addition to routine items like injuries to key players.
Like those factors that ultimately may determine your success on the field and in the coaching profession, neither you nor I can control the tax policy changes which might be coming as part of the Biden administration’s plan to pay for trillions of dollars of additional federal spending on infrastructure and social programs. Among the initiatives outlined in the American Families Plan: raising the top marginal individual income-tax rate by 2.6 percentage points, increasing the capital-gains rate for high-income investors and ending an inheritance tax exemption.
Much uncertainty remains. The current proposals may be considered a starting point for some of the expected changes by Congress, which could also reject some or all of the administration’s proposals. If passed, the timing for many of the potential changes to the tax code likely wouldn’t take effect until next year, although some may take effect for 2021.
Regardless of the timing and final details of the almost certain tax reform, it is important to work hand-in-hand with your tax advisor and your Financial Advisor to help you put a strategy in place to control what you can control and to address these four questions.
Question: How Can I Manage Taxes On My Current Income?
One place to start is to think about minimizing your taxable income. There are numerous ways to do that, but one key strategy is to save as much as you can in your tax-advantaged accounts, For most coaches and their families, this means maximizing a 401(k) or 403(b) plan as well as a 457(b) plan if your employer offers one. Setting aside pretax dollars in these accounts may help you reduce your taxable income today, while you make progress toward long-term goals, such as retiring with a sizeable nest egg.
If you’re charitably inclined, another way to reduce your taxable income is through charitable contributions. For tax year 2021, you may deduct cash contributions of up to 100% of your adjusted gross income if made to a qualified public charity, subject to certain limitations1. In addition, for those at least 70½ years old, you can usually make what’s known as a qualified charitable distribution (QCD) to an eligible organization of up to $100,000 per year directly from your IRA, generally with no tax costs to either you or the charity receiving your donation2. Your tax advisor can guide you on how best to put any of these strategies in place.
Question: How Can I Help Minimize Taxes On My Investments?
In taxable investment accounts, like a brokerage account, it may be a good idea for some investors to consider holding securities for more than a year, so that any appreciation will be taxed at the lower, long-term capital gains rate. If you do need to tap into your investments to free up cash, your Financial Advisor can look at your overall portfolio to identify which assets, including longer-term holdings, may result in a lower tax bill if sold today.
You may also want to consider a longer-term strategy known as tax-aware asset location. This generally involves placing tax-efficient, lower-growth assets in your taxable accounts, while putting higher-growth assets, such as high-dividend-paying stocks, in tax-advantaged accounts to help minimize your exposure to current taxes.
Tax loss harvesting is another way to potentially lower your tax costs in a taxable investment account. When selling investment securities at a loss, you get to recognize a capital loss, which you may be able to use to offset capital gains3. If you have offset all your capital gains and still have capital losses remaining, you can apply up to $3,000 of excess capital losses to offset your ordinary income. Still have capital losses after that? If so, you can use them to offset income or capital gains in future tax years.
Question: How Can I Lessen The Bite of Taxes On My Retirement Savings?
Just as you consider the impact of taxes while you’re working and saving for retirement, it’s important to be strategic about taxes once you stop working full time and start living off your nest egg.
One such strategy is income smoothing, in which you take future taxes into account when determining how much to withdraw from your retirement accounts each year. For example, you may decide to withdraw more money than you need from certain tax-advantaged accounts, such as traditional IRAs (but not Roth IRAs), earlier than required to lower the balance that’s left when you need to start taking required minimum distributions (RMDs) from those accounts. The reason? Even though you’d have to pay taxes now on the withdrawals, if done correctly, you could avoid being pushed into a higher tax bracket that would result in larger payments when your RMDs kick in. Plus, you’d have more resources to spend and enjoy during the most active years of retirement.
Question: How Can I Preserve More Of My Wealth For Family Or Charity?
Taking steps to minimize how much of your estate goes to taxes can allow you to leave a larger legacy to the people and causes you care about most. One strategy involves making financial gifts to younger generations while you’re still alive. Federal law allows you to gift up to $15,000 per person per year ($30,000 per person per couple) without owing U.S. federal gift tax. Gifts that exceed that amount will count toward your lifetime U.S. federal gift and estate tax exemption, which for 2021 is $11.7 million per person and $23.4 million per married couple.
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If your generosity extends to charities, making arrangements while you’re alive not only can help to ensure that the donation follows your wishes, but also that it can help reduce your taxes now. Donating to a donor-advised fund, for example, allows you to get a current tax deduction for your contribution to the donor-advised fund, while retaining advisory rights over the donated amount, which may grow through investments over time. Your Financial Advisor should be able to direct you to a donor advised fund, a 501(c)(3) public charity structured to offer you a simple, tax-advantageous way to support your favorite charities.
Regardless of how many of these strategies apply to you and your family, we strongly advise that you have a coordinated effort between your tax advisor and your Financial Advisor to minimize the damage that tax reform may cause you. It has been our experience that every little bit helps in regards to being as tax efficient as possible. We are certainly here to help if you or your family need it. In the meantime, best wishes for a successful and uninterrupted season.
About The Authors
Keith Norris, First Vice President and Financial Advisor, and Matt Kuerzi, Vice President and Financial Advisor, are co-founders of The Derby City Group at Morgan Stanley in Louisville, Kentucky. They have combined over 40 years of experience helping families with their financial planning4. In 2019, Matt was recognized by Forbes in their first ever list of “Best-In-State Next-Gen Advisors”. He can be reached directly at (502) 394-4094 or firstname.lastname@example.org.
Branch address: 4969 U.S. Highway 42, Suite 1200, Louisville, KY 40222
For more information, please also refer to https://www.morganstanley.com/articles/tax-efficient-investing and https://www.morganstanley.com/articles/tax-2021-joe-biden-tax-policy.
(1) The 100% limitation excludes giving to private non-operating foundations and any contributions made to donor-advised funds (DAFs).
(2) Inherited IRAs are also eligible for QCDs.
(3) Remember that the “wash sale” rules won’t let you recognize a tax loss on a current basis if you buy the same or substantially identical securities within 30 days before or after the sale that generates the tax loss.
(4) Keith Norris, First Vice President, Financial Advisor, experienced in the financial services industry since 1997. Matt Kuerzi, Vice President, Financial Advisor, experienced in the financial services industry since 2002.
The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be appropriate for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Investment Advisers Act of 1940, ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
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Source: Forbes Magazine (September 2019). Data provided by SHOOKTM Research, LLC. Data as of 3/31/19. SHOOK considered Financial Advisors born in 1980 or later with a minimum 4 years relevant experience, who have: built their own practices and lead their teams; joined teams and are viewed as future leadership; or a combination of both. Ranking algorithm is based on qualitative measures: telephone and in-person interviews, client retention, industry experience, credentials, review of compliance records, firm nominations; and quantitative criteria, such as: assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary, and advisors rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC, which does not receive compensation from the advisors or their firms in exchange for placement on a ranking. The rating may not be representative of any one client’s experience and is not indicative of the Financial Advisor’s future performance. Neither Morgan Stanley Smith Barney LLC nor its Financial Advisors or Private Wealth Advisors pays a fee to Forbes or SHOOK Research in exchange for the ranking. For more information see www.SHOOKresearch.com
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