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Think differently about tax reform

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The Tax Cuts and Jobs Act of 2017 is a recent tax law reform that will affect your taxes this year. Remember, this is tax reform, not necessarily tax cuts. This will affect every American differently. To understand its effects, you should speak with your tax adviser well before year’s end.

More importantly, you need to think differently as well. Planning taxes in the future is a slippery slope, but it’s something that you need to think about.

While this is just an opinion, a couple things are for certain. First, the U.S. has a significant amount of debt, which will someday have to be repaid. The likelihood of higher future tax rates would seem inevitable. Many experts believe we may be experiencing the lowest tax rates for a while. If that’s the case, what should you do?

Here are some questions to ask and issues that might affect you, which may get you thinking. Might it make sense to pay more net tax now, than later? If so, how would you do it?

First, you need to estimate what your taxes might be in 2018 versus what they were in 2017. If you plan to get a large refund, save it, don’t spend it. Pay off debt, save for the future or invest it. This will be good advice you will receive from your tax adviser or wealth manager.

Next, consider how your taxes may be impacted in the future. For example:

A couple of issues should be considered. If you are high-income married taxpayers, what happens if the first spouse dies? Your income may remain largely the same, but then you will file as a single taxpayer (rather than a joint taxpayer). That means you could potentially have higher tax rates, including higher Medicare Part B premiums.

At a recent meeting, one colleague opined that “taxes are on sale,” meaning rates are lower than he expects them to be in the future. If this concerns you, read on.

Realizing additional income this year is one way to pay additional income tax, with the new tax law’s lower tax rates.

There are a couple of ways to accomplish this. Of course, one way is to find a part-time job, but most retirees don’t want to do that. Another way to generate additional taxable income is through accelerating distributions from IRAs and tax-deferred annuities.

When you turn 70½, IRA and qualified retirement plan owners are forced to take annual required minimum distributions (RMDs). If you are not yet 70, perhaps you might want to take distributions early. And it may be advisable for you to convert those distributions to a Roth IRA, which, if you follow IRS rules, allows that money to grow tax-free for the remainder of your life, and potentially defer income tax for the lives of your beneficiaries.

You may also have money in tax-deferred annuities that is going to be subject to income tax to someone at some point in time. Withdrawing some money and paying more income tax today may alleviate some of those problems in the future. Again, this also depends on your age. If you are under the age of 59½, additional tax penalties may apply if you withdraw money from a tax-deferred annuity.

For taxable investment accounts, ask your financial adviser or tax adviser if you should consider including tax-managed investments. In the last decade or so, more focus has been paid to these portfolios, which attempt to minimize annual capital gain distributions. The more tax-efficient your investments are, the potentially lower income taxes you will pay. You may also consider realizing capital gains this year – with the hope of limiting future gains.

As you can see, there are various strategies to consider for tax planning. Consulting your tax adviser is an excellent use of your time this fall. Just be sure to think practically and long-term when it comes to taxes.

Paul Marrella is a wealth manager at Marrella Financial Group LLC in Wyomissing. He coaches families in managing their wealth throughout southeastern Pennsylvania. He can be reached at (610) 655-9700.

Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. Marrella Financial Group, LLC is not a registered broker/dealer and is independent of Raymond James Financial Services. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. It is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Paul Marrella and not necessarily those of Raymond James.

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