Three Tips for Reducing Your Tax Liability

Most people agree that paying taxes is essential for maintaining infrastructure and supporting essential functions of our government. However, no one wants to pay more taxes than necessary. Effective tax planning can help reduce your tax bill, allowing you to keep more of your hard-earned money in your pocket. This is especially important for retirees who need their savings to last. Here are a couple ways to do that!

Three Strategies to Reduce Your Tax Bill:

1 - Consider Which Assets to Leave to Beneficiaries:

• Leaving highly appreciated assets like stocks or real estate to your heirs upon your death can help avoid capital gains taxes.

• The "step-up in basis" rule resets the asset's value to its current market value for heirs, minimizing their capital gains tax.

2 - Pay Taxes Efficiently:

• Utilize available income-tax deductions, such as the higher standard deduction for those 65 and older.

• Itemize deductions if they exceed the standard deduction, including mortgage interest, medical expenses (over 7.5% of adjusted gross income), and bunch charitable contribution to maximize the tax benefits.

• Utilize “bracket management” strategies that aim to reduce lifetime taxable income by understanding your present and future tax burden. This can be done by shifting income from high-earning years to low-earning years.  

• Proactively shift assets from tax-deferred IRAs to a Roth IRA when you are in a low tax bracket. This often occurs in the early stages of retirement, before Social Security benefits or Required Minimum Distributions (RMDs) kick in.

3 - Ensure Investments Are in the Proper Accounts:

• Differentiate between taxable accounts (like brokerage accounts) and tax-advantaged accounts (like traditional IRAs, 401(k)s, or Roth IRAs).

• Place tax-efficient investments in taxable accounts and place investments with high levels of taxable income in tax-advantaged accounts.

Where should you invest?

This depends on the type of investment. Ideally, you want investments with minimal or no taxes in your taxable accounts. While the highly taxable investments, like bonds that pay a high coupon, should be placed in tax-advantaged accounts. Monotelo Advisors can assist in determining the best investment accounts for your unique situation and help you explore other strategies to ensure tax efficiency.

By following these strategies, you can legally minimize your tax burden and keep more of your hard-earned money.

This article is a general communication being provided for informational and educational purposes only and is not meant to be taken as tax advice, investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions, inflation or US tax policy. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.

LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.

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