By JP Pedinielli

Start the New Year on a positive note by capturing additional tax savings. Integrating tax sensitive saving and investing tools can help you improve your bottom line.  Begin by using your most recent tax return as a guide. Identify the types of income and deductions on the return and estimate the impact of increasing or decreasing each item.  Working with an experienced tax or financial planner can make this process less intimidating. Here are four common areas where some keen planning often pays dividends.  

Stacking charitable deductions:
                The new Tax Cuts and Jobs Act makes charitable contribution planning more complex. More taxpayers will be using the standard deduction since it has increased, while the allowable itemized deductions have taken a hair-cut; new limits on mortgage interest, elimination of misc. expenses and a $10,000 limit on deductible taxes have changed the game. These changes could reduce the tax benefits of gifts to charity absent more diligent planning.  Solution:  consider stacking multiple years gifts into one year, rather than spread the financial donation out over several years.  This will help to exceed the standard deduction threshold every few years and take the standard deduction in the off years. If  you are reticent about giving a larger gift all in one year, consider using a Donor Advised Fund;  you can fund the DAF and take a large deduction in one year and the DAF will payout your gift over  2, 3, or more years to various charities.  For example, if  you donate $15,000 of cash or appreciated securities a year to a charity, you might consider donating $45,000 in a single year in order to receive a greater tax-deductible benefit.  If the donation was made on a yearly basis at $15,000, you might not exceed the annual threshold and thus losing the tax benefit from the contribution.

Tax-efficient investments:
                Determine your marginal tax rate for each type of income so you allocate your cash to the highest after-tax investments. Tax rates vary for bonds, municipal bonds, qualified dividend and capital gains to name a few.  Which type of investment makes the most sense for you? Investors can often increase their annual return on investment by 1%-3% by selecting the higher after-tax holding or by holding an investment in a particular tax advantaged account.  Consider the after-tax yield on municipal bonds compared with taxable or corporate bonds before making a fixed income investment.  Sometimes selling appreciated assets in order to maximize your marginal tax bracket can also make sense. 

The right type of retirement account
                Get help selecting a retirement plan that provides the greatest income deferral and flexibility for annual funding. By estimating the tax rates you are likely to incur next year and in retirement years, you can improve your retirement funding strategy. If this year’s tax rate is higher than your retirement tax rate, fully fund your retirement plan to maximize the tax benefit from the rate differential.  Some retirement plans can yield deductions exceeding several hundred thousand dollars! If your retirement tax rate is likely to be higher than your current rate, fund your Roth account and consider a Roth conversion to use todays lower tax rates. Do you think our current low tax rates will be around in 10 years,  that scenario seems unlikely.   

Don’t pay taxes twice:
                It is important to keep track of your non-deductible or after-tax retirement contributions to avoid paying tax again upon withdrawal. It’s often possible to move after-tax balances into a Roth IRA to avoid the record keeping of pre & post tax dollar’s in a single bucket. Moving after-tax balances to a Roth IRA has the added benefit of capturing tax-free income on the higher Roth balance.  Prepare your plan now for retirement withdrawals to reduce lifetime income tax and maximize investment return.  The optimal mix of Roth withdrawals, Roth conversions, traditional retirement payouts combined with mandatory retirement plan withdrawals and Social Security benefits can add years to your income stream. 

Combing your tax planning and financial planning is a powerful combination that will help you put together the best strategies to achieve your financial retirement goals. Let’s take advantage of the opportunity to plan your financial success.