Andy Friedman’s 8 Tips to Cut Taxes for Clients Before Congress Acts

 Friedman suggests that, especially in a rising tax environment, investors hire investment managers who employ strategies that maximize after-tax returns by “balancing investment and tax considerations – buy and hold, harvesting losses, tax lot selling.”

Professional managers who keep their portfolio’s holdings turnover in check, who buy stocks producing qualifying dividends and who are in the habit of “selectively using tax-advantaged hedging techniques as an alternative to taxable sales” will all pay off for taxpayers, he writes.

6.  Take Advantage of Tax Deferral

Friedman argues that while fund managers who seek to maximize returns can be rewarding to investors, doing so without an eye to the tax consequences of those high returns can be, well, taxing. Instead he counsels that investors should hold “tax inefficient investments in tax-deferral vehicles,” and start by mazimizing their contributions to their IRA and 401(k) accounts.

Even if Congress “might see fit to impose a cap on the total assets an individual can hold in retirement accounts, as the president has proposed,” Friedman says the amounts in those accounts “likely would be grandfathered.” He also suggests that higher-income taxpayers consider using a deferred annuity to provide “additional tax-deferred compounding on retirement savings,” and life insurance, since the death benefits are usually free of capital gains and income taxes. “If the life policy is held inside an irrevocable life insurance trust (ILIT), proceeds are also free from estate and gift taxes.”

7.  Donate Appreciated Investments to Charity

Friedman reminds advisors and their clients that donating appreciated assets to a recognized charity produces a dual tax benefit:  “a deduction equal to the full value of the asset contributed … without recognition of gain on the asset appreciation.”

Don’t limit yourself to thinking such donations can only be made at “irregular” intervals. One example: “instead of making weekly or monthly payments to a church or other religious institution, an investor can pay a year’s worth of contributions with appreciated assets.”

8.  Use Your IRA for Philanthropy 

The budget legislation passed by Congress last December (see 14 Tax Changes in PATH Bill End Uncertainty for Many Planners) made permanent an on-again, off-again provision that allows taxpayers 70 ½ and older to make up to $100,000 in tax-free charitable donations directly from their IRAs. At the same time, Friedman says, the donation “counts toward satisfying the individual’s required minimum distribution [RMD] obligation.” So Friedman suggests that qualified taxpayers are “well advised to use IRA funds to make their first charitable contributions, before using nonqualified money.”

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