Tax Strategies

Jenna, I always try to keep tabs on where I am with realized capital gains, and I endeavor to keep them as low as possible and all long-term, since qualified dividends already take me into the 15% bracket. I always max out our Roth contributions early in the year (preferably on January 1). I want that money growing tax-free as soon as possible.

You're smart to bundle your donations. I should probably do that too, but I don't because non-tax considerations get in the way. 

For my children, I try to harvest as much tax-free long-term capital gain as I can by selling and immediately buying back certain appreciated securities. Unlike the wash sale rules for losses, you can sell and immediately repurchase shares to realize gains. State income taxes are still an issue in this regard, but that's the price we pay for locking in a higher basis for future capital gains.

I use what could be loosely described as the bucket approach outlined in the November AAII article titled "Five Approaches for Allocating Your Retirement Portfolio" in which three buckes are used.  The first bucket (TIRA) generates discretionary income for spending. The second bucket (Roth) is for future needs if necessary, or to be inherited. It is actually following to a degree the AAII growth portfolio. The third bucket (taxable brokerage) is essentially a non-dividend stock portfolio, which is to be inherited, so I just let it ride - no capital gains harvesting and just a little bit of dividends from some money markets in the account. The main 10 stocks are discussed here:  Growth, No Dividends, One Year Later | Seeking Alpha.  So, the above is the background of my retirement investments and what I do each December is download next year's tax software and put into the software my best guess of all my income for the year in order to check my marginal and effective tax rates.  I am really more concerned with keeping my effective tax rate in the mid-single digits than worrying about the fact that some of my money is being withdrawn from my TIRA at 22.2% (1.85 x 12%). For instance, in 2022 my effective tax rate was around 2% as I did not withdraw any TIRA money, except for some QCD's as I spent down some of my taxable account cash. It's not really any "Tax Magic," it is just focusing on the present with one eye on what you can control in the future, which is really just the relative split between the 3 types of accounts (TIRA, Roth, & Taxable Brokerage). Minimizing the taxable brokerage as much as possible solves most of your tax problems.

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DAVE GILMER
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It amazes me how much time and effort we all have to put in just to try to deal with the federal tax code.

I forgot to mention in my earlier post that I also max out contributions to our HSA (Health Savings Account). That is probably the best tax deal going right now. You get an immediate above-the-line deduction, and the money grows tax-free as long as it is eventually spent on medical services and products (including Medicare premiums). I have only two more years that I can contribute to my HSA, because contributions are no longer allowed once you're on Medicare. For those who still have employer-provided medical insurance after age 65, the rules related to HSA contributions are yet another mess of regulations to navigate.

It's sad, and incredibly unfair, that the tax code won't let everyone contribute to an HSA. Your medical insurance policy has to be designated as "HSA eligible" in order to make such contributions. That's just one more unnecessary hoop of complexity to have to jump through.

(I have to confess that although I complain about it, I actually enjoy figuring out ways to minimize taxes while maximizing asset growth. I wonder if this illness is in the DSM.)

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Rob Adams
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This is my favorite AAII journal for the year.... I wait for it each year.  Once I get it, I review all of the different brackets including the Medicare, capital gains and income brackets.   

In years where I itemize, I review the following:

I look at capital gains vs. losses and make sure I have offsets. I also group or bunch charitable contributions via a combination of QCDs and donations to my charitable fund. Remembering that QCDs can not be put into a charitable fund and must be directly given each year. 

I also look to see how much of my traditional IRA I can convert to the Roth and still stay in the same tax bracket and not incur any Medicare IRMA, etc.....  it is quite a balancing act.  I heartedly recommend converting as much from the traditional IRA to a Roth at least 2 years before hitting Medicare age of 65.  I say 2 years because the income earned to years previously, is the income used to determine your current Medicare rate.  No one shared this with me, so I learned the hard way.   While I know mathematically, there may not be an advantage to conversion for purely income tax purposes; it will affect your IRMA for Medicare if your your RMDs add too much to your income...... so this is a real rub.

Then I look at the state taxes and real-estate taxes.....  isn't much you can do about these, right now there is a limit of $10k.  

I also collect all of my medical expenses:  premiums for additional healthcare, long term disability, Medicare, dental , vision, etc.   Then collect the out of pocket costs incurred for the year noting the trips made so that I can calculate mileage and noting the current rate from the AAII journal.  

This would all be far simpler if we each paid a flat tax after a standard deduction..... the government would end up with more money, we could eliminate most of the IRS and cheating and dodging that folks do because.... no more deductions.  It would be fair to everyone and take far less time leading to higher productivity.  It would probably moderate real-estate prices as there would be no deduction for interest paid, etc. Seems quite logical to me.

Any thoughts?

Linda, your idea of a simple flat tax after a standard deduction is TERRIBLE! Just think of all the poor lobbyists it would put out of business. Think of all the special-interest donations our wonderful politicians would have to forego. Also think of the political power it would take away from these "caring" leaders. Think of all the CPAs and lawyers who would have to look for other work. And what would we do with all those countless hours we now spend each year trying to figure it all out? Think of the FUN we'd all miss!

Shame on you!

(For those of you without a sarcasm detector, I'm being sarcastic. I LOVE Linda's idea! But it makes too much sense and robs politicians of their power, so our geniuses in DC will never go for it.)