The tax laws of 2018 have changed, and we’ve seen many of the itemized deductions removed along with personal exemptions.
But just because the system is changing doesn’t mean you won’t be able to find tax advantages. On this edition of our weekly Lifetime Income series, financial planner and Financial Sense Newshour host Jim Puplava discusses the legal ways to reduce your tax burden through your investments.
“If you're in the Middle Class, you've got some wonderful breaks here,” Puplava said. “If you're in the upper-income category, it’s not looking so good.”
For upper-income categories, you're going to have more of your income taxed at the 32 and the 35 percent bracket than you did under the old system.
“These brackets are going to be important because this gets very complicated,” Puplava said. “You now only have certain brackets that you pay a marginal tax rate on. You have a certain level of income on which you pay an Obamacare tax, and then you also have a different level of income when it applies to dividends and capital gains.”
One of the first ways is to understand how the new laws apply to capital gains taxes, which, if used to your advantage, can help maximize your income streams.
“When it comes to long-term capital gains, meaning you've held the asset for over a year, if you are single and in a zero to 25 percent tax bracket in 2018...you pay zero capital gains tax,” Puplava said.
Those in the 25 to 39.6 percent bracket will pay 15 percent. The greatest efficiency is for married couples, though, as the first $77,200 of dividends or capital gains are taxed at a rate of zero.
This is another reason to own dividend-paying stocks because you can pay anything from zero to 20 percent tax. This certainly beats the 22, 24, 32, 35 and the 37 percent bracket, which would apply on ordinary income.
Other Methods of Reducing Your Tax Burden
Tax-sheltered income is also available in the form of tax-free municipal bonds. There are also master limited partnerships, in which a good majority of the dividend is non-taxable, though that's less of an advantage today with these lower tax rates.
There is no limitation on the interest expense you can deduct on investment real estate. Another option is a Roth IRA conversion. It may be worth taking a portion of a 401k rollover into a Roth IRA in a low-tax year as well. Tax-free income can also be had in the form of health savings accounts.
“For a lot of upper-income individuals, those tax brackets are going to get hit pretty hard in those upper brackets,” Puplava said. “The more money that you save on taxes, that's more dollars that you can set aside that will accumulate for your own retirement.”
Married couples have tax advantages over those filing alone when it comes to those upper-income brackets.