Oct. 2017 - Year-End Tax Considerations

Federal income tax reform is in the news, but we will believe it when we see it. There is little to be gained from assessing tax proposals or “Capitol Hill rumors” regarding what might emerge. Once any changes are enacted in the law we will assess the ramifications for investors. In the meantime there are steps you can take, based on current tax law, to maximize your 2017 after-tax returns.

What’s My Rate?

You should begin by estimating your marginal income tax rate, which is the effective rate you would pay on an additional dollar of taxable income. This is important as investors weigh yearend portfolio rebalancing decisions that could generate taxes on realized capital gains. Estimating your tax bracket is complicated by a variety of deductions, exemptions and tax credits, but tax software or a tax professional can help you with the calculation.

Short-term capital gains (gains on investments held one year or less) are treated as ordinary income, so these gains are taxed at your marginal income tax rate. Rates levied on long-term capital gains (investments held longer than one year) and on qualified dividends face a different schedule based on one’s filing status and taxable income. This is summarized in the table on page 73. While most taxpayers confront a long-term capital gain levy of 15 percent, those in the highest tax bracket incur 20 percent. Investors in higher tax brackets might also confront the net income investment tax (NIIT). The NIIT can impose an additional 3.8 percent on dividends, interest, and any net gains from the disposition of property such as common stocks or mutual funds.

It’s clear that the tax code provides strong incentive to hold investments for longer than one year, and to avoid recognizing gains at all until it’s time to “spend down” – often in retirement. Except for portfolio rebalancing that can mean holding investments for decades. There are several additional techniques beyond simply deferring your gains that can boost after-tax returns.

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Also In This Issue:
Quarterly Review of Investment Policy
New "Backpage" Layout
The High Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked by Yield
Asset Class Investment Vehicles

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