Fiduciary Trust International


Six Planning Strategies for a Higher Income Tax Environment

March 2014

Proactive planning is very important in today’s environment, including preparing projections of estimated taxes and gaining an understanding of your potential tax liability. With this perspective, the following strategies can be useful in managing your tax situation.


  • Delay one-time income occurrences

If possible, postpone lump sum income such as bonuses or the sale of a business into a future tax year, especially near year-end. Many variables can change your tax bracket from year to year, including investment income, deductions, and ability to offset gains. However, even if you are in the same bracket in a future year, the time value of money means a dollar saved in taxes today is worth more than a dollar saved in the future.

  • Fully utilize tax-advantaged savings opportunities

Today’s tax laws increase the benefits of making contributions to tax-deferred retirement accounts such as 401(k)s and IRAs. Contributions to these plans may reduce your adjusted gross income (AGI), potentially keeping you in a lower income tax bracket.

  • Consider an installment sale

Arranging the sale of high-value items, such as real estate, collectibles or other property, in an installment sale can help defer capital gains tax. The buyer takes possession of your property immediately while paying you over time in periodic installments, spreading gains over multiple tax years.


  • Harvest losses at year end

We never recommend making portfolio decisions for tax reasons alone. However, if you are planning on selling a security, selling at a loss at year-end rather than waiting until the next year can help offset taxable gains and reduce your AGI.

  • Use capital loss carryovers against current year capital gains

If you have carryover losses from a prior year (the amount of capital losses that exceeded your capital gains in past years over the $3,000 annual limit), be sure to use them to further offset any gains in the current year.

  • Amortize taxable bond premiums

If you hold taxable bonds that you purchased at a premium, consider amortizing the premium on the bonds.Rather than taking a capital loss at disposal, you can amortize the premium over the life of the bond and use it to reduce the tax liability on the income you receive from the bond each year. Since interest income can be taxed at a much higher rate than capital gains, the tax benefit could be greater.

For example, if you pay $11,000 for a 10-year bond with a $10,000 face value and a 5% yield, you would have a $1,000 capital loss at maturity. However, if you elect to amortize the $1,000 premium over the 10-year life of the bond (approximately $100 per year), you can use the amortization amount to reduce the taxable income of the bond each year. Instead of owing income tax on all $500 of annual interest income, only $400 would be subject to tax ($500 interest received less $100 amortization). You would not have a capital loss when the bond matures,but since the maximum capital gains tax is just 23.8% compared to income tax rates as high as 43.4%, that capital loss would not be as valuable.

  • Allocate assets tax-effectively and minimize portfolio turnover

From an asset allocation perspective, use investments that generate taxable income such as corporate bonds in your tax-advantaged accounts such as IRAs and 401(k)s. The dividend and interest income will not be treated as taxable income when received. Conversely, allocate investments that generate tax-free income, such as municipal bonds, to your taxable accounts where it will not affect your current income from a tax perspective.

In addition, excessive portfolio turnover can cause realized gains, triggering a tax bite and possibly moving you into a higher tax bracket. If it makes sense from an investment perspective, limiting turnover and controlling when gains are realized can be helpful in reducing the tax impact generated by these sales.


  • Make charitable gifts before year end

If you are making charitable gifts, plan to make your gifts before the end of the current year rather than the beginning of the next year to maximize current-year tax benefits.

  • Pay estimated state and local income taxes in the current tax year
If you pay estimated state taxes quarterly, you can pay your final installment in the current year, and deduct that amount in that year. You may also pay an additional amount, up to your total expected liability in the current year if you’d like to deduct that amount in that year as well. However, if you are subject to the Alternative Minimum Tax (AMT), you should consider delaying payment until the following year.

  • Shift medical expenses into years where you will have a lower AGI
Since medical expenses can only be deducted if they exceed 10% of your AGI (7.5% for taxpayers 65 or older at yearend) it may make sense to shift deductions between years. If possible, incur medical expenses in the year in which you will have the lower AGI because the lower your AGI, the greater your potential allowable deduction.

  • Pre-pay mortgage interest

Mortgage payments can generally be made in December on a loan payment that is due early in the next year to increase your current year’s deductions.


  • Gift property rather than cash

Consider using appreciated property instead of cash when planning for your charitable gift giving. Instead of potentially realizing capital gains on the sale of property to raise cash for charitable contributions, gift the appreciated property instead. This enables you to give a gift to a charity and not recognize gain, while potentially fully recognizing a deduction for the fair market value of the property.


  • Run projections to determine the most advantageous filing status

Same-sex married couples must now file tax returns as married filing jointly or married filing separately. In most cases filing jointly will be the most tax-advantaged;however, couples should run projections both ways to determine the best outcome for their own situations.

  • Consider amending prior year returns

Couples should also look to see if amending prior year returns may benefit them.


  • Evaluate the potential tax benefits of paying out trust income

Trustees and executors should consider distributing income to beneficiaries. Because trusts reach the highest brackets for both regular taxes and the new Net Investment Income Tax much quicker than individuals, a tax savings can be realized by distributing income to beneficiaries who may be in lower tax brackets, therefore reducing the overall tax burden.


This communication is intended to provide general information. The information and opinions stated herein are as of March 2014, unless otherwise indicated, and do not represent a complete analysis of every material fact. We undertake no obligation to update this information. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual tax or investment advice or as a recommendation of any particular security, strategy or investment project. Please consult your personal advisor to determine whether this information may be appropriate for you. IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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Six Planning Strategies for a Higher Income Tax Environment

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