Posts Tagged "tax deferred"

Deferring taxes sounds like a good idea, but is it?

Posted on Mar 25, 2011

Reporting income on the installment method to defer taxes isn’t always the best strategy. For instance, say an investment property you bought years ago has appreciated. You decide to sell, agreeing to accept a down payment now, with the balance of the sales price due over the next two years. When you file your tax return, you can report the income from the sale over the agreement term. This strategy spreads the tax on the gain over the same time period. But there may be circumstances when you’d be better off electing to recognize the gain in the year of sale and pay tax currently. In addition, there are cases when the installment method is not available, such as if you regularly sell the same type of property on an installment plan. You could be considered a dealer, meaning you’re unable to use the tax break except in special situations. Sales of business inventory items are also generally ineligible, as are stocks traded on an exchange. Another example of a sale that doesn’t qualify for installment treatment is selling your property at a loss. Assuming the loss is deductible, you’d have to recognize the full amount in the year of sale. When the sale does qualify for the installment method, you may still elect out. Reasons to consider doing so include the availability of capital or net operating losses that offset the gain, or credits that reduce the tax. An expectation of higher income in the future – which would put you in a higher tax bracket – may also make reporting the full gain in the year of sale a good idea. Other items to consider include passive activity losses you’ve been unable to use in prior years and depreciation recapture. Special rules apply to both. Understanding the tax implications before you sell can save money. Give us a call. We’re ready to help you analyze the pros and cons of reporting your sale on the installment...

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Where you hold an investment matters

Posted on Dec 17, 2010

You’ll probably be reviewing your investment portfolio at year-end for tax and rebalancing purposes. As part of your review, check to be certain you are holding your specific investments in the right type of account. Your goal is to hold investments that produce ordinary taxable income in tax-deferred accounts and to hold those that produce tax-free or tax-favored income in your regular taxable accounts. Consider this situation. If you hold tax-free municipal bonds in a tax-deferred retirement account, you are “sheltering” interest income from taxes that never would be taxed in the first place. Withdrawals from the retirement account will be taxed as ordinary income at ordinary income rates, and that includes interest from the municipal bonds. The result is that normally tax-exempt earnings eventually become subject to income tax. Another example: Long-term capital gains are taxed at lower rates than interest income. So investments generating interest might be better held in retirement accounts, while investments generating capital gains might be better held in taxable accounts. Remember, withdrawals from retirement accounts (other than Roth IRAs) are taxed at ordinary income rates even if the income comes from long-term capital gains. Tax-deferred retirement plans should outperform an investment account that is exposed to annual taxation. But if you’re not careful where you hold specific types of investments, you could end up with less rather than more...

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