Tax bracket drives strategies

Tax bracket drives strategies

Before taxpayers select year-end planning strategies, it’s important to first calculate their individual tax bracket.

The marginal tax bracket will determine which strategies could be beneficial and drive all other financial planning decisions.

Chris Hennessey discusses the importance of understanding income levels, while highlighting some ideas for clients in different tax brackets.

Consider different strategies:

1. Low tax bracket. Taxpayers may want to consider a Roth IRA conversion. The process of converting a traditional IRA to a Roth generates a taxable event. A lower tax bracket may mean less tax liability.

2. High tax bracket. Investors may want to explore taking as many deductions in 2014 as possible, such as medical or other deductions that can be pre-paid. This process of “bundling” deductions may reduce taxable income. Another strategy is harvesting investment losses to offset capital gains.

There are also some key tax thresholds to consider. Limits for taxpayers subject to the 3.8% Medicare surtax on investment income are $200,000 for individuals and $250,000 for couples.

Itemized deductions begin to phase out for individuals earnings $254,200 or higher or for couples with an income of $305,050 or higher.

Of the marginal tax brackets, the highest rate is 39.6% for an individual earning over $406,750 and for couples with income exceeding $457,600.


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