Today's commentary comes courtesy of Glover Davis. He is New York based Tax Accountant & Financial Advisor with 25 years of experience.
If you believe, as I do, that income tax rates for you may be higher in the future; here are a couple of tax saving strategies that you may want to consider and implement. Most of this is extremely time-sensitive so you will need to act before December 31, 2008 to realize the full benefits:
- Harvest your capital gains on securities (mutual funds, stocks, bonds & etc.) that you may have held for a number of years by selling them on or before December 31, 2008. Even though you will pay income taxes on the capital gains now – you probably will pay a lower income tax rate for 2008 than you will in 2009 and thereafter since it would appear that income tax rates on capital gains are going to move higher. The difference between paying taxes at the current rate of 15% rather than a future rate of say 25% or 28% is substantial and would result in tremendous savings on your income tax bill.
- Harvest your tax losses in January 2009, rather than in December 2008 for the same reasons. If you use your harvested losses to offset future gains when the capital gains tax rate is higher, you maximize your tax savings since every dollar you reduce your capital gains taxes by produces a greater income tax saving for you.
These are unconventional tax savings tips but they are absolutely valid since the numbers have been run to prove it. You may want to examine some numbers yourself to test these positions. Most other tax professionals advocate the opposite simply because they think in the conventional sense; that is why these are unconventional tips & strategies!
- It is a great time for funding your ROTH IRA rather than adding to your 401(K) or funding your tax-deductible IRA and the reasoning is simple: When the time comes for you to start taking distributions from your traditional/rollover IRA or 401(K), you have no way of knowing whether your income tax rates on the distribution will be lower than the rate of saving that you are realizing while making the taxable saving/funding of these tax-deferred plans. If your actual tax rate is likely to be higher than it is today; then the ROTH will prove to be the better tax strategy. All distributions from your ROTH IRA, once you meet the qualifications – minimum age and or time in the ROTH IRA – you will be taking distributions “tax free” which is extremely beneficial in periods of rising income tax rates. Couple that with, the idea of investing these ROTH contributions a little more aggressively now or as soon as possible while security prices are extremely low and you should receive a substantial economic benefit down the road. You can then coordinate your retirement distribution dollar amounts between your taxable traditional IRA/401(K) and your tax-free ROTH IRA plans by electing to take a portion from both plans. This will yield additional tax savings while meeting your annual retirement income requirements.
Look for additional income tax tips and strategies during the income tax filing season.
Glover Davis - Tax Accountant & Financial Advisor