Minimizing Taxes Now and Forever

April 15 is fast approaching and is the deadline for paying your individual income taxes, even if you request an extension to file your return. In Wyoming, we are very lucky to not incur a state income tax; however, you may owe state income taxes if you derive income and own property in other states. Income taxes can potentially be a large annual expense, leaving many taxpayers to wonder what they can do next year to reduce federal and state income taxes, as well as any other taxes that will affect them and their loved ones in the coming years.

Those with large estates, exceeding $5.49 million upon their death, should be planning now for ways to reduce the federal estate tax. Married couples can exempt just less than $11 million from the estate tax. If your estate exceeds this amount, you will pay Uncle Sam 40 percent of the value above the exemption amount. Some states have a much lower estate tax exemption, which could create a tax liability in those states upon death.

Due to the large federal estate tax exemption, the estate tax is a moot point for most taxpayers. However, your family may owe income taxes on your investment accounts after your death. Without getting into all the nitty-gritty tax details, a basic understanding of how some investments and accounts are taxed is beneficial.

The type of investment account will determine if you need to report investment earnings on your tax return. If you have investments in tax-deferred accounts, the interest, dividends and capital gains or losses do not get reported on your annual tax return. Your earnings are reinvested and taxed only when you take money out of these types of account. Tax-deferred accounts include company retirement accounts such as 401k(s), individual retirement accounts (IRAs) and annuities.

Funds withdrawn from tax-deferred accounts are taxed as ordinary income. If you have large balances in your tax-deferred account, your withdrawals may force you into a higher tax bracket. If you are taking Social Security or have pension income, your required minimum distributions once you reach 70½ will be taxable income in combination with any other income.

The exception to this rule is for Roth IRA accounts. Amounts withdrawn from Roth IRA accounts are not taxable. Contributions to Roth IRAs are not deductible and, if the holding periods are met, all earnings can be withdrawn tax-free.

One thing to consider is how these accounts will affect your heirs after your death. Those who inherit your IRAs or other tax-deferred investments will pay the income tax when they take distributions. Unless you leave these accounts to charity, the person who receives them cannot escape the income tax liability.

If you hold investments in a regular taxable brokerage account, the interest, dividends and capital gains or losses must be reported on your annual tax return. By carefully planning which types of investments are held in taxable vs. tax-deferred accounts and by off-setting gains and losses, you can minimize your annual taxable income.

When you pass away, investments in your taxable accounts receive a step-up in basis that allows your heirs to inherit these assets and adjust the cost basis to their value at your date of death. By adjusting the cost basis to date-of-death values, there could be little to no taxable gains on the sale of those assets. For example, if your grandfather purchased investment property in 1940 for $5,000 that is now worth $500,000, he can leave you that property at his death and you could sell the land for up to $500,000 and pay no income taxes on the gain. If your grandfather were to sell the property for the same amount before his death, the $495,000 gain would be taxed.

While we have been trained to believe that reducing income taxes today is always the best approach, I suggest you reconsider the mantra of “defer, defer, defer.” By looking to the future and having a multi-year or multi-decade tax plan, you may be able to reduce your overall lifetime income taxes and reduce taxes after your death for your family.

This commentary originally appeared April 1 on

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

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Connie Brezik, CPA/PFS, CFP®

As a wealth advisor at Buckingham Strategic Wealth, Connie works with clients to form a comprehensive financial plan tailored to their individual circumstances, one that includes portfolio management, tax strategies, wealth transfer considerations, retirement analysis and education planning. She welcomes the chance to help clients work through difficult situations, finding solutions that they may not have thought of and guidance about what to do if their plans don't work out as anticipated.

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