Now that it’s tax season, it might be a good idea to start planning to reduce taxes this year right now by reviewing your IRS Form 1040 with your financial advisor or tax professional. A review of Form 1040 can reveal opportunities to save on taxes you may have missed before. For example, the difference in rates between ordinary and qualified dividends is 43.4% versus 23.8%. Short term capital gains distributed by mutual funds are taxed as ordinary dividends, so your choice of investments and investment vehicles can make a difference.
Capital gains should be offset by losses to the greatest extent possible. An effective tax loss harvesting program will take advantage of losses year round and not just at the end of the year. Other tax saving opportunities include using IRA distributions to make charitable gifts, reducing your exposure to the Alternative Minimum Tax and limiting taxes on Social Security. A new one is the Medicare Surtax that tacks on another 3.8% to net investment income over certain thresholds. Planning now will save dollars later.