You Just Received an Inheritance? So did Uncle Sam!

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The only difference between a taxidermist and a tax collector is that the taxidermist only takes your skin.

– Mark Twain

Don’t try to keep your inheritance a secret from the IRS by sending them an email. There are other ways you might consider for reducing your tax exposure:

Tax-managed mutual funds. There are really only two ways these vehicles can attempt tax-efficiency – low turnover or offsetting gains with losses. It’s an option, but frankly not one of my favorites.

Municipal bonds or municipal bond funds. The interest on municipal bonds is usually exempt from federal taxes – and sometimes taxes at the state and local level, too. The higher your income tax bracket, the more you may benefit from owning “munis.”1; but, you need to do some math to compare taxable vs. tax-free yields. For example, someone in the 28% federal tax bracket would need to earn 4% % on a municipal bond to realize the same after-tax income as a 5.55% corporate bond would provide. There’s more, though: Financial stability. There are some California cities issuing bonds you may not want to buy.

Consider tax-advantaged strategies. While you can contribute up to $5,500 annually to an IRA plus an additional $1,000 per year if you’re over age 50 (for the 2014 tax year), and while IRAs offer tax deferral — you pay no taxes on earnings until withdrawal — and may provide tax deductions2 , they may be of limited help dealing with a large inheritance. It just might be that institutional money management with a tax-optimized strategy may make more sense; but, there are a lot of factors at play. That’s one conversation you need to have with your advisor.

Take advantage of loss/gain tax rules. Actually, this is akin the prior point. If you hold an investment for a year, you’ll be eligible for capital gains tax treatment – usually less than paying income tax rates, up to 39.6%, which would apply if you sell sooner. The same capital gains rate also applies for dividend income.3 As for positions with losses, sell by December 31 and deduct up to $3,000 in investment losses from that year’s tax return. Any excess losses can be carried over to future years and used to offset capital gains.

Some of this may sound simple; but, it’s not simplistic. And, you should get professional tax and investing advice before making any moves. Don’t rely on this, or any other, post for tax or investment advice. That’s best done first-hand with someone who knows you and your situation.

Jim

Notes:

1Income may be subject to the alternative minimum tax. Capital gains, if any, are subject to taxes.

2Withdrawals before age 59½ are subject to a penalty tax. Each type of IRA has respective income limits as well as deductibility rules.

3Lower rates apply for long-term capital gains and dividends for taxpayers who are in lower tax brackets. An additional 3.8% Medicare tax may also apply.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.

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