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From Blue Summit Wealth Management Four Tax-Lowering Investm

| April 03, 2014
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The American Taxpayer Relief Act of 2012 (ie. The Fiscal Cliff Deal) along with the Affordable Health Care Act of 2010 (ie. Obamacare) have created a number of changes that may impact your taxes in the current year.

After hosting a full-house Lunch & Learn on this topic last month, we wanted to share the Four Tax-Lowering Investment Ideas for 2014 with everyone, so that you might mitigate your tax liability and/or increase your net income this year (read below).

Keep in mind that you should always consult with your tax professional for specific questions regarding your particular tax circumstances.

Real Estate:

How Do Shareholders Treat REIT Dividends for Tax Purposes?

For REITs, dividend distributions for tax purposes are allocated to ordinary income, capital gains and return of capital, each of which may be taxed at a different rate. All public companies, including REITs, are required early in the year to provide their shareholders with information clarifying how the prior year’s dividends should be allocated for tax purposes. This information is distributed by each company to its list of shareholders on IRS Form 1099-DIV. A return of capital distribution is defined as that part of the dividend that exceeds the REIT’s taxable income. A return of capital distribution is not taxed as ordinary income. Rather, the investor’s cost basis in the stock is reduced by the amount of the distribution. When shares are sold, the excess of the net sales price over the reduced tax basis is treated as a capital gain for tax purposes. So long as the appropriate capital gains rate is less than the investor’s marginal ordinary income tax rate, a high return of capital distribution may be attractive.

Municipal Bonds:

Tax Policy is a Positive

Following the “fiscal cliff” deal of January 1, investors received a resolution to the question that dominated the muni market during late 2012: whether or not the interest on municipal bonds would be taxed in 2013 and beyond. Municipals in fact dodged the tax bullet despite speculation to the contrary, and they in fact received good news in the form of increased taxes on wealthy investors. The new rules stemming from the fiscal-cliff deal increase the income tax rate from 35% to 39.6% on income above $400,000 for individuals and $450,000 for married couples. Those in the top tax bracket will also face a tax increase on their investment income. Higher taxes, in turn, are expected to fuel increased demand for tax-exempt investments, which is a significant positive for the supply-and-demand equation.

Annuities:

You should consult your tax professional for complete information regarding annuity taxation. Following is a basic summary of certain tax considerations of which you should be aware.

  • A qualified annuity is taxed identically to any other qualified account such as an IRA, 401(k), profit sharing plan or other tax-deferred retirement account.

Nonqualified annuities are taxed differently from most investments:

  • A nonqualified variable annuity grows tax-deferred until withdrawals begin or the policy is annuitized.
  • A nonqualified annuity does not provide a step-up in cost basis at death, and the deferred earnings will be taxable as ordinary income to a non-spousal beneficiary.
  • Spousal continuation of the policy may be available to preserve continued tax-deferred growth.
  • An annuity is included in your estate for estate tax purposes.

Pension Planning:

The fiscal cliff deal allows virtually all traditional 401(k), 403(b) and 457 plan account balances to be transferred to Roth 401(k) plans. Previously a big chunk of 401(k) plan money, such as pretax contributions made by employees until they are age 59½, were not eligible for transfer to Roth 401(k) plans. The change raises money for the federal government by collecting taxes on the money moved from traditional 401(k) account to a Roth 401(k).

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