Tax Saving Strategies

by Franklin J. Parker, CFA

“How can I save money on taxes?” has to be one of the top questions I have received over the course of my career. There are several simple things we can do to help reduce your taxes. In fact, for most folks, we can suggest strategies that may reduce your taxable income by over $100,000.

So, here is our list of top ideas for you to consider and discuss with your financial advisor and your tax professional.

Many advisors recommend moving money from your Traditional IRA into a Roth IRA. This is known as a Roth Conversion. The benefit is that you move money from being tax-deferred to tax-free, which can be helpful. However, the downside is that the amount you move adds to your taxable income today, and that tax cost can be significant. (If you are confused about the various types of accounts, don’t worry! We make it very simple).

In fact, I have rarely seen a Roth conversion make sense once the tax cost is factored in.

We have a better strategy. We call it a Covered Roth Conversion. There are some moving parts to making it work, and there are several caveats that you should talk about with us, but the basic idea is this:

• We convert funds from your IRA to your Roth IRA. This is the “Conversion” part.
• In the same tax year, using funds from your taxable account, we invest in a special type of investment that generates substantial income tax writeoffs. This is the “Covered” part.

This structure can allow us to completely offset the tax cost of doing a roth conversion while giving you the benefits of the Roth IRA:

• Tax-free growth
• Tax-free withdrawals
• No required minimum distributions
• Pass a legacy to your heirs

One of our advisors can walk you through the specifics of the strategy, and give you a report on exactly how much taxes you can save with this idea.

There are several types of investments that can help reduce your taxable income today. They are typically not publically traded, and you must be an accredited investor to access them (meaning, among other things, that you have $1,000,000 or more net worth), but these investments can give you special tax benefits.

While these investments may not be appropriate for everyone, they can give you several tax benefits, including specific income-tax writeoffs, tax credits, or longer-term benefits like pass-through depreciation that can offset future income.

In addition to the tax benefits, these investments can be good portfolio diversifiers or sources of outsized returns.

If you are over 65, you get two significant tax breaks from 2025 through 2028.

From 2025 to 2028, seniors can now claim an extra $6,000 deduction per person, in addition to the already-existing deductions! Since these benefits stack, you can claim:

• $15,750 as your standard deduction
• $2,000 as your standard senior deduction
• $6,000 as your special senior deduction (available until 2028).
• $23,750 as your total deduction

For married filers, this is per-person, giving a total $46,700 in deductions for senior couples.

As always, there are caveats, including an income phase out of this deduction. You should speak to your financial advisor and tax professional about whether these deductions apply to you.

You should make sure that your savings are getting the maximum deductions.

Contributions to your workplace retirement plan are deductible today against your taxable income, and you can contribute up to $23,500 across all of your plans, reducing your taxable income by the same amount. If you are over 50, however, you get some added benefits:

• If you are over 50, you get a total $31,000 contribution per year, and that reduces your taxable income dollar-for-dollar.
• If you are between 60 and 63, you get a super-catchup contribution for a total contribution of $34,750.

But retirement savings are not the only types of deductible savings you can make.

Health savings accounts (HSAs) are another option to maximizing your tax benefits. These contributions are tax-deductible, they grow tax free, and they are tax-free if withdrawn for medical expenses. Families can contribute $8,300 per year and people 55 or older get an extra $1,000, for a total potential of $9,300 per year.

Optimizing your medical and retirement contributions could allow you to reduce your taxable income by $31,800 to $44,000 per year.

Before you sell your real estate, business, or investments, you should do some tax planning. That little bit of planning can save you significantly on taxes longer-term.

Real Estate. If you are considering selling a real-estate asset, you should consider a 1031 exchange. In this structure, you defer your capital gains by reinvesting into another property at the time of the sale. This requires some legal and tax planning ahead of time (you can’t do it after it is sold!), but could keep you from paying the capital gains on the sale today.

This is an especially effective strategy if you want to pass the new real estate on to your heirs. Your heirs get a “stepped-up” basis in the property (it gets a cost basis based on the value at the time of death not based on where you bought it), and between these two strategies you may be able offset most capital gains taxes.

Business Sales. If you are selling a business, or part ownership in a business, you can consider a like-for-like exchange. In this strategy, you can sell your business in exchange for shares in a similar business. This can allow you to exit while gaining some diversification or a heavy dividend income.

This is a more advanced strategy and requires substantial planning and may not be a benefit for everyone. That said it is worth considering to minimize capital gains.

Tax-Loss Harvesting. This is a strategy wherein we sell investments that have lost value and reallocate those funds to other investment opportunities. This strategy can help significantly, especially if you need to offset significant capital gains.

Trusts offer legal structres that can give you several benefits, impacting both your estate structure and your income taxes so it is importrant to understand all of the implications.

Charitible Remainder Trust (CRT). In a CRT, you set up an irrevocable trust and then transfer highly appreciated assets into that trust. The trust then gives you an income for the rest of your life, or for a certain period of time. The remainder of the trust is then given to a charity.

• This allows you to avoid capital gains on a highly appreciated asset.
• You get a partial income tax benefit when you fund the trust.
• This also reduces your taxable estate as the assets are no longer owned by you.

Intentionally Defective Grantor Trust (IDGT). In an IDGT, you fund an irrevocable trust with a gift or a sale. The trust is structured so that the assets are considered owned by the trust for estate tax purposes, but are taxed at your income tax level. This helps you avoid the very high tax rate applied to trust income.

• This structure helps reduce estate taxes.
• It generates lower taxable income so the trust can grow without tax drag.
• Takes advantage of valuation discounts which can multiply gifting exemptions.

There are many strategies involving trusts, each with their own unique tradeoffs. You should discuss them with your legal and tax professionals. That said, trusts can be a key tool for helping offset capital gains, income, and estate taxes.

Directional Advisors does not offer tax nor legal advice. All strategies should be discussed with your tax and legal professionals.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.