Tax Planning, Financial Planning

Tax-Saving Strategies: “Gotchas” and “Gimmes”

March 19, 2024

Tax-Saving Strategies: “Gotchas” and “Gimmes”

(Part Two of our three-part series)

Effective tax planning requires navigating a complex minefield of potential “gotchas” and “gimmes” that can unexpectedly impact your tax burden. With a tax code running over 1 million words – and depending in large part on your individual situation - identifying all of the potential “gimmes” and “gotchas” is beyond the scope of one article. But there are several “gotchas” and “gimmes” that relate directly to your portfolio and trust/estate planning, it’s important to keep these in mind when comparing tax planning strategies.

Tax “Gotchas”

When doing tax planning – including (for example) determining whether and when to harvest losses in your portfolio, and whether to file singly or jointly - you should consider the following potentially unexpected “penalty” taxes.

Alternative Minimum Tax (AMT)
Probably the most well-known “gotcha,” AMT is a separate tax system that requires some taxpayers to calculate their tax liability twice and pay whichever amount is highest. Thanks to the 2017 Tax Cuts and Jobs Act (TCJA), which significantly reduced the impact of the AMT by enacting a higher AMT exemption, only 200,000 taxpayers are paying AMT today. But if Congress allows the TJCA to sunset at the end of 2025, that number will skyrocket to 6.7 million taxpayers in 2026. i

Net Investment Income Tax (NIIT) on Passive Income
The NIIT (Form 8960) imposes a 3.8% tax on certain types of investment income for individuals, estates, and trusts. Generally, the NIIT applies to interest, dividends, rental and royalty income, non-qualified annuities, and capital gains from the sale of stocks, bonds, and mutual funds, capital gain distributions from mutual funds, and capital gains from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence). But you owe NIIT only if your modified adjusted gross income (MAGI) exceeds a certain amount: single ($200,000), married filing jointly ($250,000), and married filing separately ($125,000). ii

Additional Medicare Tax (Form 8959) on Employment Income
In addition to the Medicare taxes you pay on your earnings, the Additional Medicare Tax (also known as the “high earners tax”) imposes a 0.9% tax on wages that exceed a certain threshold (generally $200,000 for individuals, and $250,000 for married couples filing jointly). The unexpected “gotcha” comes when a married couple each earns less than $200,000, but combined exceeds $250,000 on their tax return. iii

Income Related Monthly Adjustment Amount (IRMAA)
IRMAA is not a tax like the previously mentioned Medicare taxes—it’s a Medicare premium cost—but your income is what triggers it. Increases in income, like capital gains and RMDs, may push you over the threshold to increase your Medicare premium; however, you may not realize it right away, because the impact occurs two years after you realize the income. While this increase may only last a year (since your Medicare premium costs reset every year), you should remember to factor a potential year of IRMAA into the costs of your tax strategies.

Tax “Gimmes”

Similarly, when evaluating your trust/estate/financial planning, you should keep the following tax-advantaged solutions in mind.

Using Appreciated Securities for Charitable Donations
If you donate long-term appreciated assets to charity, you generally don’t have to pay capital gains, and you generally can claim an income tax deduction for the full fair-market value up to 30% of your adjusted gross income. iv

Bunching to a Donor Advised Fund (DAF)

Many taxpayers won’t surpass the standard annual deduction threshold ($27,700 for filing jointly and $13,850 for individuals), but by bunching years of charitable donations to a DAF in a single year, you immediately receive a tax deduction in the year you contribute to the DAF, but still can distribute the funds to your preferred charities over time. v

Taking Advantage of QCDs (Qualified Charitable Distributions)

Unlike traditional charitable contributions, a QCD transfer of funds from your IRA directly to a qualifying tax-exempt organization can reduce your taxable income, which can in turn lower IRMAA and may qualify you for some tax credits. vi (Learn more about QCDs in our April 11 blog)

Annual Exclusion Gifting
Giving away assets from your taxable estate within the gift tax exclusion limits each year creates no tax impact for you or for the recipient, and it can reduce the size of your taxable estate and eventual estate tax burden. vii

Leveraging HSAs and Roth IRAs

HSAs (Health Savings Accounts) and Roth IRAs are two tools you may want in your tax toolbox. HSAs offer a triple-tax advantage—deposits are tax-deductible, growth is tax-deferred, and spending (within the guidelines) is tax-free. viii Roth IRAs have no required minimum distributions (RMDs) and withdrawals are not subject to income tax, even for your heirs. ix

Washington Trust Wealth Management Can Help

At Washington Trust Wealth Management, we work with your CPA on tax planning strategies to address tax “gotchas” while taking advantage of every available “gimme”.

Next in the series:

  • Tax-Efficient QCDs (April 11)

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