Date: May 19, 2015

7 Strategies for Maximizing Your Tax Deductions and Protecting Your Wealth

While today’s individual income tax rates are nowhere near the historical highs of the postDepression 1940s, marginal rates are still considerable depending upon location and the amount of wealth you’ve accumulated. Numerous factors are at play when determining your tax burden, and as a conscientious earner, it is imperative to understand the complex American tax code and how it is possible to maximize deductions and protect your hard-earned money.

Many fail to realize that not all income is taxed at the highest marginal rate. For a family in Texas making a total of $500,000 a year, their applied tax rates can range anywhere from 0% all the way to 43.4% depending on the sources of income as seen below:

If the family acquires wealth not only through fixed income but also from dividends, capital gains, or withdrawals from retirement accounts, those sources break down and are taxed at set individual rates. For the average American taxpayer, of course, understanding this calculation proves rather complicated. Luckily, there is a way to approach your intricate tax situation in a manageable way. Consider the following 7 strategies for maximizing your deductions and protecting your welldeserved fortune.

1. Bunch Itemized Deductions

It is not enough to simply compile paperwork and record all your legitimate deductible items. A smart taxpayer understands the manner in which he or she can maximize those deductions by bunching them together or spreading them apart from year to year. For instance, many employee business expenses are subject to the 2% rule, whereby you can only deduct miscellaneous workrelated costs once they cumulatively exceed 2% of your adjusted gross income (AGI). In this scenario, it is more beneficial to declare a number of big-ticket items at once to get the most bang for your buck, rather than to save individual deductions for a future tax year. Speak to your CPA about strategic bunching of write-offs such as medical expenses, charitable contributions, trade dues, and more.

2. Manage Timing and Income

If you are self-employed or have any discretion as to when you receive your earnings, be cognizant of changing rates when it comes to the bracket system. By exercising smart, legally sound decisions about the timing of your cash flow, you can secure your status in a lower tax bracket or avoid an unwanted “bump” up into a higher one. For instance, if you work in sales and anticipate a particularly lucrative end of the year, it may help to delay payment until after New Year’s. Retirees may also employ this strategy by withdrawing from their IRAs or annuities early to take advantage of a low tax year.

3. Asset Location

Asset location refers to the practice of matching the tax characteristics of your various investments with those of your different account structures. By manipulating your money’s placement and being aware of accounts that are taxable, tax-deferred, or tax free, you can use the protection of the account to effectively shield your biggest tax generating investments.

Utilizing this maximizing strategy can reduce tax drag by as much as .50% annually.1 As an educated taxpayer, you are only taking advantage of the fact that different types of investments are taxed at higher and lower rates. As an example, you would want to hold a stock that pays no dividends in your taxable account as there is no annual tax labiality and sales are taxes at favorable rates (as long as you hold longer than one year). By contrast you would want to shield the annual tax burden from a high yield bond fund from taxes by holding it in an IRA or 401k. By moving your money and achieving an optimal balance, you make a sizable difference to your tax bill.

4. Lower Your Minimum Required Deductions

In any given year, a taxpayer’s minimum required distribution is based on the previous year’s balance as of December 31st. For retirees, one strategy for avoiding a hefty required withdrawal is to convert some of your Traditional IRA dollars to a Roth IRA. For instance, if an individual has $100,000 in a Traditional IRA, he or she can convert some of the funds, say $50,000, into a Roth IRA, which grows tax-free for life. While the conversion is a taxable event, it can be used to take advantage of a low-tax year. Now, the retiree’s minimum required distributions are literally halved. Be sure to consult with an advisor regarding more complex situations involving inherited IRAs or leaving your IRA to future heirs.

5. Manage Capital Gains and Losses

As an intelligent investor, you should supervise your capital gains and losses in order to minimize your taxes owed. In any given year, an individual taxpayer is allowed to deduct up to $3,000 of investment losses against his or her annual earnings. If you experience short-term losses, take advantage of them by offsetting your long-term or short-term gains, and be sure to keep careful record of your taxable portfolio. While one of your investments may have taken an unfortunate financial dive, the event can help alleviate your tax burden over the coming years.

6. Gifts to Family Members

The magic number for gift giving, whether to a family member or friend, is $14,000 per tax year (in 2015). You can offer this sum to anyone tax-free, and over a lifetime, the federal government offers an exemption of $5.43 million dollars. Moving your finances in this way, especially with family, can optimize all of your tax situations. There are many complex factors at play, though, such as the potential use of trusts, the gifting of income assets versus cash, and the event of your death. Familiarize yourself with the ways in which gifting can positively impact your tax situation in the short and long run.

7. Gift Highly Appreciated Assets

This final strategy is designed for philanthropic taxpayers. If your family exercises a policy of regular charitable donation, you can maximize your gift by furnishing it in the form of an appreciated investment. If you have highly appreciated securities, consider donating investments imbedded with gains instead of presenting a mere check. In doing so, you leverage your charitable funds in a way that benefits those in need, effectively satisfying your conscience without lining the pockets of Uncle Sam. Use your regular charity as a means of emptying gains out of your portfolio, gaining a tax deduction and lowering your bill in the process.


These 7 strategies and resources will put you on the path to keeping more wealth in your pocket.



Loic LeMener

Loic LeMener, CFA®, MBA, CFP®, is the founder of Opus Wealth Management.