Income Tax Planning
Rates and character
Know the difference between marginal and effective rates, and between ordinary income, long-term capital gain/qualified dividend rates, and the 3.8% net investment income tax (thresholds $200,000 single / $250,000 MFJ, not indexed). Recognize that phaseouts - Social Security taxation, IRMAA, education credits, child tax credit - create effective marginal rates far above the stated bracket.
Timing and basis
Planning levers include bunching deductions, deferring or accelerating income across brackets, Roth conversions in low-income years, harvesting gains at 0% where applicable, and harvesting losses (wash-sale rule: no substantially identical security 30 days before or after). Basis rules matter: IRAs have no step-up at death; most other capital assets do under IRC §1014; inherited Roth accounts carry their own distribution rules.
Entity and compensation
S corporation reasonable compensation, 409A deferred comp elections, QBI deduction (§199A) limits, and the difference between distributions and wages all appear in questions about business-owner clients.
Traps
- Forgetting state income tax in a multi-state client's plan.
- Assuming a step-up in basis applies to retirement accounts or to lifetime gifts (carryover basis applies to gifts).
- Ignoring NIIT and the 0.9% additional Medicare tax.
- Harvesting a loss and repurchasing a substantially identical fund within the window.
Rule of thumb
When comparing a Roth conversion to a deferral, compare the marginal rate paid today with the expected marginal rate at withdrawal, including the widow(er)'s single-filer bracket and IRMAA. If the rate is equal, Roth conversion wins on tax diversification and no RMDs.