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Let’s Manage Your Tax Bill

So we’ve still got some time left in 2021, which means that right now may be a great opportunity to do a little tax planning. This is especially true if you’re retired and you’re looking for ways to potentially lower your tax bill, either right now, or over the long-term. Here are a few things you might consider doing: 

1. Manage the Taxation on Your Social Security Benefits

First, think about ways that you may be able to manage the taxation on your Social Security benefits. Have your financial advisor check to see how much of your Social Security is taxable, if any, and then look for ways to maybe reduce that amount. One way to do that is to manipulate your Modified Adjusted Gross Income calculation, or MAGI, by changing where you receive your income from other sources.  If you’re able to do that, it can, in turn, affect the amount of tax you pay on your Social Security benefits. By lowering your MAGI, you may also lower the taxes you might be paying on your benefits. 

2. Manage Your Income Tax Bracket

Next thing to do is to try to manage your income tax bracket.  Of course, in order to do that, you have to know WHERE you are in the bracket. Understanding the source of your income gives you the ability to manage your income streams to potentially keep you in, or out of, specific tax brackets. This has a lot to do with controlling your future RMDs well before you turn age 72, or “accelerating” income into your current bracket through a Roth conversion, or maybe deferring some income into the future.  You do have some options here. 

Part of this process involves selecting the appropriate-basis securities to sell first. If you have room in the zero percent bracket for long-term capital gains, you may want to sell any low-basis stock first. But if you’re near the top end of the bracket, then selling high-basis stock might make more sense for you. As I said, it all comes down to where you are in the tax bracket, and this is one of the ways you manage your income on your tax return. How much gain do you want to show? It really depends on how much room you have in the bracket.  Your advisor can help you with that as well. 

3. Harvest Non-IRA Portfolio Gains and Losses

Next, you may want to consider aggressively harvesting any non-IRA portfolio gains and losses. Personally, we actually like harvesting portfolio losses to offset other income more than using them to offset long-term capital gains, especially if you’re in the 12 percent ordinary income tax bracket. Why? Because it’s kind of a waste to use a loss to offset a zero percent long term capital gains tax; it may be better to use that loss to offset ordinary income and thus reduce your MAGI. That maximum $3000 loss on ordinary income can reduce your MAGI for Social Security taxation purposes, which could potentially keep as much as $2550 of your Social Security out of taxation. 

These are just a few of the many ways to manage your taxes for 2021 and beyond. Tax management and tax-efficient strategies are things we do all the time here at Lucia Capital Group. If you’re concerned about your tax bill for this year and want to know how to potentially manage it to your advantage, just give us a call.  We’re here to help. 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

No client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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