You just finished your 2016 taxes, but it’s not too early to make plans for 2017. As a CPA, financial adviser and former IRS agent, I see a lot of financial plans that don’t consider tax efficiency.
It’s important that as you build your plan, you think about some strategies to reduce or defer your taxes now or in the future. Here are some strategies to consider:
1. Tax harvesting
Usually, this strategy is implemented near the end of the calendar year, but it can be done at any time. With tax-loss harvesting, you sell off holdings that have a loss position to offset the gains you’ve experienced from other sales. The asset you sold is then replaced with a similar investment to maintain the portfolio's asset allocation and expected risk and return levels. It won’t restore your losses, but it can ease the pain.
2. Using long-term gains and the 0% tax rate
For those who fall within the 15% tax bracket, your long-term gains are tax-free. Make it a habit to project your taxes and to look for tax opportunities every year as part of your plan.
3. Making IRA contributions
You have until April 17 of 2018 to make a Roth or traditional IRA contribution for the 2017 tax year, but why put it off? In fact, ou could even use your income tax refund to fund it. Remember, a Roth creates tax-free income in the future, which is worth its weight in gold.
4. Using the “backdoor” Roth
Some people make too much money to contribute to a Roth IRA or to take a deduction on a traditional IRA. But you still can make a contribution to a traditional IRA without the deduction and later convert it to a Roth. There’s no tax due, except on growth in the account that you earn between the time of the contribution and the conversion. If you hold money in a traditional IRA for a short time only, the growth — and the resulting tax — should be small.
5. Exploring financial vehicles that can defer taxes on dividends, interest and capital gains
Tax deferral allows you to employ the triple compounding effect: It pays interest on the principle, interest on the interest and interest on the taxes that you would have paid if you were in an investment that was taxed annually.
In 2017 — or any year for that matter — don’t wait until the end of the year to think about the moves that could save you on your tax return. Get together with your financial adviser or tax professional now to discuss a plan that will help you succeed in your goals.
Kim Franke-Folstad contributed to this article.
Chris Harlow is a Certified Public Accountant and CEO of Harlow Wealth Management (opens in new tab), serving metropolitan Portland and southwest Washington to help clients craft their financial strategies for retirement. Chris’ past experiences have instilled in him a dedication to guiding clients through tax and retirement strategies. He has passed the FINRA Series 65 securities exam; holds life insurance licenses in Washington, Oregon and Arizona; and has his CPA license.
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