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Three Tax Planning Concepts

D Kelly-Dohse 2014
Denise Kelly-Dohse, CFP®
Vice President, Wealth Advisor
[email protected]
(585) 419-0670 x50619

There are many ways to potentially reduce your tax burden. Here are three tax planning concepts that you should be familiar with.

1. Tax deferral

When you defer taxes to later years, any earnings compound without being reduced by income taxes. As a result, your investment may grow at a faster rate than if earnings were subject to income tax each year. In some cases, such as with an employer-sponsored retirement plan or a traditional IRA, tax deferral may be combined with an initial tax deduction or exclusion from income for contributions.

Tax deferral can be provided by tax-advantaged accounts that generally defer any taxation until distributions are made. Examples include employer-sponsored retirement plans and IRAs, annuities, health savings accounts (HSAs), Coverdell education savings accounts (ESAs), and 529 plans. Taxation of capital gains is generally deferred until property is sold. Tax deferral may also be available through the use of strategies such as installment sales and like-kind exchanges.

Tax deferral can be the most beneficial when you defer tax until a time when your tax rate will be lower, or at least when it will be no higher. If your tax rate will be higher later, there may still be an advantage to tax deferral, but you'll need to run the numbers to determine whether the benefits of tax deferral might overcome the higher tax rate.

2. Tax-free income

Interest income from municipal bonds can generally be received free of federal income tax. Qualified distributions from Roth IRAs, Roth 401(k)s, HSAs, ESAs, and 529 plans can also be received free of federal income tax. In some cases, such as with a Roth IRA, tax deferral may be combined with tax-free income.

3. Special tax rates

The tax rate on long-term capital gains and qualified dividends is generally 0% for taxpayers in the 10% and 15% tax brackets, 15% for taxpayers in the 25% to 35% tax brackets, and 20% for taxpayers in the 39.6% tax bracket. In some cases, such as with stock, special tax rates may be combined with tax deferral.

Note: To the extent that distributions from tax-advantaged accounts such as employer-sponsored retirement plans and IRAs, annuities, HSAs, ESAs, and 529 plans are subject to tax, ordinary income tax rates apply; they generally do not qualify for special capital gain tax rates.

How We Can Help

Be sure to work with a trusted financial planner to optimize tax planning within your total financial picture. If you have any questions, please contact Denise or any other member of our team of Financial Planning Officers at 585-419-0670.

Tax information presented is not to be considered as tax advice and cannot be used for the purpose of avoiding tax penalties. Canandaigua National Bank & Trust does not provide tax, legal, or accounting advice. Please consult your personal tax advisor, attorney, or accountant for advice on these matters.

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.