Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
A bill that aims to repeal the federal estate tax has to do more with changing the rules on income tax for the benefit of the heirs of wealthy people, writes Josh Hoxie, director of the Project on Taxation and Opportunity at the Institute for Policy Studies. Affluent families would be able to avoid paying estate tax as well as the capital gains tax on the long-term holding of productive assets under the legislation, Hoxie says. Instead of the proposed repeal, lawmakers should back the Responsible Estate Tax Act sponsored by Sen. Bernie Sanders, I-VT., which "is a strong step towards addressing economic inequality through fixing the shortfalls in our current estate tax." -- Forbes
Investors find energy-oriented master limited partnerships appealing because of their tax benefits. According to the Internal Revenue Service, MLPs should earn at least 90% of their income from sources such as coal, timber and industrial source carbon dioxide in order to avoid corporate income tax imposed by state and federal officials. Clients interested in creating energy-oriented MLPs can choose from upstream, midstream and downstream MLPs. -- Forbes
Taxpayers can expect a relief in paying their income tax next year because of inflation, according to experts. Standard deduction, personal-exemption amounts, tax-bracket tables, and other figures have to be adjusted based on inflation as required by law. "Indexing effectively provides an automatic tax cut for most individuals, without the need for Congress to agree on legislation each year to make it happen," says Jim Young, an accountancy professor at Northern Illinois University. The Wall Street Journal
States differ on how they tax pensions and retirement income, Social Security, and estates and inheritance, according to Kiplinger. Retirement income is not taxable in seven states; including Alaska and Florida, while New Hampshire and Tennessee impose taxes on dividends and interest. As much as 85% of Social Security benefits are taxed by the U.S. government, but most states exclude them from the state income tax. -- Kiplinger
As an investment adviser, Neil Malling encouraged clients to save all they could in their 401ks and IRAs. He did the same. "I drank the IRA cool-aid all the way," the Portland resident says today. But last year, after turning 70-and-a-half and taking his first required IRA distribution, he revised his advice. That's because his federal tax bill jumped from $1,700 to $4,700, mostly because of a $9,000 taxable withdrawal from his traditional IRA. How does a senior in the 15 percent tax bracket wind up paying a 30 percent tax on his IRA distribution? "It's totally contrary to what the IRA was set up for," Malling says. Malling and several million other seniors are falling victim to tax-code wrinkles that essentially cause a higher percentage of their Social Security income to be taxed when they draw money from their retirement plans. -- The Oregonian
What's the most tax-efficient way to receive secondary income? Consider a seat on a company's board, a stimulating part-time job, particularly during semiretirement. Board members are usually paid with cash and shares in the company, typically restricted stock that vests after a few years. You can reduce the tax impact by deferring the cash portion of your board fee through the company's deferred-compensation plan. Most companies have "nonqualified" plans that allow directors to funnel fees to 401(k)-like plans without contribution limits. The funds aren't tax-deductible, but they grow tax-deferred until retirement. -- Barron's
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