Tax Strategies

First you have to understand everything possible about where the tax on your investments come from and act accordingly very early in your working career.

a) Has tax already been paid on the front end of an investment by using after-tax money from your "pocket" to buy them?
b) Is tax paid along the way by dividends or capital gains from investments not in a tax deferred account?
c) Is tax paid when investments are sold?

Later in your career you can assess what your retirement taxes might be and what course corrections might be necessary. If you have done well in part 1 above you may not need a course correction.  However, if you do need a course correction it might look like:

a)  Re-assessing the best time to retire and when to take Social Security and/or pensions.
b) Determining if Roth conversions are necessary during years with low income when first retired.
c) Making an estimate of your tax bracket in retirement using 100% of your current budget and factoring in expected pluses and minuses to it.

Here is a fun fact I discovered recently when exploring this subject:

In the June 2023 article about a ONE Page Wealth Building plan a couple Tom and Tina write out a written plan for their retirement. Let's say they are both age 70 and starting SS with only a taxable brokerage account and no tax advantaged accounts (traditional IRA or Roth). Wouldn't it be nice to know that for a MFJ couple in 2022 with $64,000 in combined Social Security and $38,706 of qualified dividend income they will be right on the line of paying no tax such that with $10 more of dividend income they will pay $1 tax for $102,716 of income?

To understand why this is would be easy to do with any tax software that allows you to see the forms which do the calculation, which in this case is the Social Security worksheet.

I could tell you the answer, but as they say in Texas - "what's the fun in that!"

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DAVE GILMER
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Yes, it would be nice, because they may still have time and vehicles that enable them to shift the dividend income from their taxable account to a tax favored account.  

In this scenario the additional income increases the portion of their social security that is taxable, and in turn their taxable income exceeds their standard deduction. This subjects the incremental qualified dividends ($10) to a tax rate of 10%, or $1. 

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NICK INTERDONATO
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Original Message:
Sent: 05-02-2023 00:30
From: DAVE GILMER
Subject: How can you effectively manage the impact of taxes on your investments?

First you have to understand everything possible about where the tax on your investments come from and act accordingly very early in your working career.

a) Has tax already been paid on the front end of an investment by using after-tax money from your "pocket" to buy them?
b) Is tax paid along the way by dividends or capital gains from investments not in a tax deferred account?
c) Is tax paid when investments are sold?

Later in your career you can assess what your retirement taxes might be and what course corrections might be necessary. If you have done well in part 1 above you may not need a course correction.  However, if you do need a course correction it might look like:

a)  Re-assessing the best time to retire and when to take Social Security and/or pensions.
b) Determining if Roth conversions are necessary during years with low income when first retired.
c) Making an estimate of your tax bracket in retirement using 100% of your current budget and factoring in expected pluses and minuses to it.

Here is a fun fact I discovered recently when exploring this subject:

In the June 2023 article about a ONE Page Wealth Building plan a couple Tom and Tina write out a written plan for their retirement. Let's say they are both age 70 and starting SS with only a taxable brokerage account and no tax advantaged accounts (traditional IRA or Roth). Wouldn't it be nice to know that for a MFJ couple in 2022 with $64,000 in combined Social Security and $38,706 of qualified dividend income they will be right on the line of paying no tax such that with $10 more of dividend income they will pay $1 tax for $102,716 of income?

To understand why this is would be easy to do with any tax software that allows you to see the forms which do the calculation, which in this case is the Social Security worksheet.

I could tell you the answer, but as they say in Texas - "what's the fun in that!"

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DAVE GILMER
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