Tax Planning

Parallel tax calculation system designed to ensure high-income taxpayers pay a minimum level of tax by disallowing certain deductions and adding back tax-preference items. Common triggers include private activity bond interest and incentive stock option (ISO) exercise. Taxpayers calculate both regular tax and AMT and owe the excess of AMT over regular tax as an additional tax, so in effect they pay whichever is higher. AMT exemption amount phases out at higher income levels.

Example: A high-income client purchases $500,000 in private activity municipal bonds yielding 4% tax-free int...

Tax on profit from selling capital assets, determined by holding period. Short-term capital gains (held 12 months or less) are taxed at ordinary income rates up to 37%, while long-term capital gains (held more than 12 months) generally receive preferential tax treatment at 0%, 15%, or 20% rates (collectibles gain can be taxed at up to 28%). Cost basis determines the gain amount, making holding period critical for tax planning.

Example: An investor purchases 100 shares of stock at $50 ($5,000 cost basis) and sells at $70 after 18 month...

The original value of an asset for tax purposes, including purchase price plus commissions, fees, and reinvested dividends. Used to calculate capital gain or loss when sold. Can be adjusted upward (a wash sale's disallowed loss is added to the basis of the replacement shares) or downward (return of capital distributions), and inherited assets generally take a basis equal to fair market value at the date of death, or at the alternate valuation date if the estate elects it (a step-up, or a step-down if the value fell), except income in respect of a decedent such as a traditional IRA or 401(k), which gets no step-up.

Example: An investor purchases 100 shares at $50/share ($5,000) with a $10 commission, then reinvests $200 in...

Length of time an investment is owned, determining tax treatment of capital gains. More than 12 months qualifies for long-term capital gains (preferential rates of 0%, 15%, or 20%), while 12 months or less results in short-term capital gains (ordinary income rates up to 37%). Holding period begins the day after purchase and ends on sale date.

Example: An investor purchases stock on March 15, 2024. The holding period begins March 16, 2024 (day after p...

Profits from selling capital assets held more than 12 months, taxed at preferential rates of 0%, 15%, or 20% depending on income level. Significantly lower than ordinary income tax rates (up to 37%) to encourage long-term investing. Qualified dividends also receive the same preferential long-term capital gains tax treatment.

Example: An investor purchases stock for $50,000 and sells it 15 months later for $68,000, generating an $18,...

Dividends from U.S. corporations and qualified foreign corporations that meet IRS holding period requirements (for common stock, more than 60 days during the 121-day period that begins 60 days before the ex-dividend date; certain preferred stock dividends need more than 90 days during a 181-day period). Taxed at preferential long-term capital gains rates of 0%, 15%, or 20% based on income. Non-qualified (ordinary) dividends are taxed at higher ordinary income rates up to 37%.

Example: An investor in the 32% tax bracket receives $1,000 in dividends from a blue-chip U.S. stock held for...

Profits from selling capital assets held for one year or less, taxed at ordinary income rates (10%-37% depending on tax bracket). Unlike long-term capital gains, short-term gains receive no preferential tax treatment. This higher tax burden significantly impacts after-tax returns and discourages frequent trading.

Example: An investor purchases 100 shares of stock on March 1, 2026 for $5,000 and sells them on December 15,...

Tax rule that resets cost basis of inherited assets to fair market value at date of death, eliminating capital gains tax on appreciation during decedent's lifetime. If the estate elects it, the alternate valuation date replaces the date of death. Heirs only pay tax on appreciation after inheritance. Does not apply to retirement accounts (IRAs, 401(k)s); distributions of pre-tax money and earnings from a traditional account remain taxable as ordinary income. Major estate planning benefit for highly appreciated assets.

Example: A mother purchased stock in 1980 for $10,000 that is now worth $500,000 at her death. Her son inheri...

Investment earnings (interest, dividends, capital gains) that grow without current taxation until withdrawn. Common examples: Traditional IRA, 401(k), 403(b), 457 plans, and annuities. Contributions may be pre-tax (Traditional IRA, 401k) or after-tax (annuities, non-deductible IRA). Distributions of pre-tax contributions and earnings are taxed as ordinary income. Required Minimum Distributions (RMDs) from traditional IRAs and employer plans begin at age 73 (75 for those who reach age 74 after 2032).

Example: A 45-year-old client contributes $6,500 annually to a Traditional IRA (pre-tax). Over 20 years, the ...

Investment income or gains that are never subject to federal (and sometimes state or local) income tax. Common examples include Roth IRA qualified distributions, municipal bond interest (though interest on some private activity bonds is subject to the alternative minimum tax), 529 plan qualified withdrawals, and HSA distributions for qualified medical expenses. Unlike tax-deferred accounts (taxed later), tax-free means no tax ever on qualified distributions. Roth IRA qualified distributions require the 5-year holding period plus one of age 59½, disability, death, or a first-time home purchase.

Example: A 67-year-old retiree withdraws $50,000 from her Roth IRA (opened 12 years ago) to fund a vacation. ...

IRS rule disallowing capital loss deductions when a substantially identical security is repurchased within 30 days before or after the sale (61-day total window). The disallowed loss is deferred by adding it to the cost basis of the replacement security, not permanently lost (unless the replacement shares are bought in an IRA or Roth IRA). Applies only to losses, not gains.

Example: An investor buys 100 shares of XYZ Corp at $50 per share ($5,000 cost basis), sells at $40 per share...