7 Top Tax Incentives That Entice Investors

The U.S. tax code can be loaded with booby traps for unwary investors, but your advisers can help you avoid the dangers and reap potential tax rewards. Here are seven enticing incentives to consider:

1. Offsetting capital gains and losses:

Your capital gains and losses from selling stocks and other assets may cancel each other and could reduce your tax liability. If your losses exceed your gains, you can use the excess to offset as much as $3,000 of highly taxed ordinary income. And you can use any additional losses in future years.

Even if you don’t have offsetting losses, long-term capital gains on assets you’ve held longer than a year have a maximum tax rate of only 15% (20% for those in the top ordinary income tax bracket). Investors in the two lowest tax brackets benefit from a 0% rate on long-term capital gains.

2. Low tax rates for “qualified” dividends:

Most dividends issued by domestic companies are “qualified” if they go to stockholders and mutual fund owners. In some cases, qualified dividends also may be paid by foreign corporations, including those whose shares are publicly traded as American Depositary Receipts (ADRs) or shares that otherwise are readily tradable on an established U.S. securities market.

Like long-term capital gains, qualified dividends have a maximum tax rate of 15% (20% for those in the top ordinary income tax bracket). And here, too, lower-income investors may qualify for a 0% rate.

3. Retirement accounts:

The tax law encourages participation in retirement plans that employers sponsor. Typically, you can make pretax contributions to your account and invest the assets on a tax-deferred basis.

For example, you can defer up to $18,000 of salary to a 401(k) plan in 2017 ($24,000 if you’re age 50 or older). In addition, your company may match part of your contribution. Distributions from your account, normally during retirement, generally are taxed at ordinary income rates.

4. Traditional and Roth IRAs:

Your contributions to a traditional IRA may be wholly or partially deductible, depending on your annual income and whether you also participate in an employer-provided plan. Contributions of up to $5,500 for 2017 ($6,500 if age 50 or over) can grow on a tax-deferred basis, but payouts representing earnings and deductible contributions are taxed as ordinary income.

With a Roth IRA, in contrast, contributions are never deductible, but future distributions generally are exempt from tax. You will be required to take distributions from a traditional IRA after age 70½, but that’s not required for a Roth. You can convert assets from a traditional IRA to a Roth but most, or all of the amount you convert will be taxable as regular income.

5. Real estate:

This investment has a unique status in the tax law. Not only can you write off certain expenses—including mortgage interest, property taxes, repairs, insurance, utilities, etc.—to reduce taxable income from the property, but you also can recoup the cost of the building through annual depreciation deductions.

Other tax rules may apply, including limits for losses claimed for “passive activities.” Generally, passive losses can’t exceed the amount of passive income, but a special exception may allow a limited write-off of up to $25,000 for active participants in rental activities.

6. Oil and gas:

If you invest in an oil and gas deal, you may benefit from deductions for drilling costs, depletion deductions, and the low tax rates on long-term capital gains when you sell your interest.

Write-offs may be limited by the passive activity rules, as they are for real estate, but some investors may qualify for an exception. If you have a “working interest” in an oil and gas partnership, you’re exempt.

7. Life insurance:

If you acquire either permanent or temporary life insurance for yourself, your family is in line for tax benefits when the proceeds are paid. The death benefit for a life insurance policy is completely exempt from income tax. What’s more, there’s no current tax due on any buildup of cash value.
The death benefit on your life insurance could be subject to estate tax, but you may be able to avoid that by transferring ownership of the policy to an irrevocable life insurance trust (ILIT).

This isn’t a complete list of tax breaks for investors, but these seven provisions are among the biggest and best in the tax code.

Please note that various factors such as changes in tax laws, inflation, and the uncertainty of social security can have a significant impact on the results of the study discussed in this section.This presentation was designed for educational purposes only and is not intended for specific legal, accounting, investment, income tax or other professional advice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PWM Advisory Group, LLC [“PWM”]), or any non-investment related content, made reference to directly or indirectly in the presented material(s) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from PWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. PWM is neither a law firm nor a certified public accounting firm and no portion of the presented material(s) should be construed as legal, accounting or consulting advice. A copy of the PWM’s current written disclosure statement discussing our advisory services and fees is available for review upon request. To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. ©2012 Advisor Products Inc. All Rights Reserved.