An interesting aspect of the current tax code is that if you are in the lowest tax bracket for ordinary income, you do not have to pay the tax on long-term capital gains or on qualified dividends.
The 15 percent tax bracket, for taxable income after deductions, goes up to $37,450 for an individual and to $74,900 for a married couple filing jointly. Therefore, a retired couple with $90,000-$90,000 or more in gross income may still fall into the 15 percent bracket after their deductions. This makes them eligible to pay zero tax on dividends and long-term capital gains.
Paying attention to these margins is imperative. Sometimes, it can be difficult to keep clients within the lower bracket if most of their assets are in a 401(K) or an IRA, and they must take out large distributions when they turn 70.5 years old. We attempt to manage their accounts to compensate for that. Examining their tax returns, working with accountants and tax attorneys all help in determining how much income or capital gains the client can have before being pushed into a higher bracket.
While monitoring and analyzing the tax situation, some years can still provide unexpected surprises. This can be the result of the distributions generated by investments during the last quarter of the year. These distributions can be present even in a year in which the investor lost money on the fund and can generate the phantom tax mentioned earlier. This is an inherent difficulty when investments are held outside of a tax-deferred account. Even with consistent monitoring, unexpected distributions can disrupt the calculations for intended to keep the client within the lower tax bracket.
*Excerpt From “Financial Stability For Life”, by Daniel E. Butler, CFP®
**Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Any opinions are those of Butler Financial, LTD. and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.