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Income, Estate and Retirement Planning with Taxes in Mind by Eric P. Zeitlin

Posted on April 19, 2017

Engaging in estate planning without paying attention to taxes can be a fool’s errand. Tax awareness can be tantamount to all aspects of saving, investing and even spending. Failure to consider the tax implications of any component of an estate plan may negatively affect expected returns and result in significant tax liabilities.


Tax Terms to Know

There are few things in life that are tax-free.  However, under the U.S.’s estate and gift tax laws, individuals may have an opportunity to annually gift cash or assets to as many people as they choose free of transfer taxes. For the 2017 tax year, this gift tax exclusion amount is $14,000 for individual taxpayers, or $28,000 for married couples.  Any gifts above these exemption amounts will be subject to 40 percent tax.

In addition, the U.S. tax system provides individuals with an estate and gift tax exclusion that is indexed annually for inflation. For 2017, individual taxpayers may transfer up to $5.49 million in assets to their heirs without incurring federal estate taxes, or $10.98 million for married couples during life or at death.

Tax-free gifts enable individuals to reduce the value of their estates and potentially eliminate exposure to the estate tax, also known as the death tax, when they pass away. Similarly, individuals may receive the benefit of unlimited gifts when they pay tuition directly to a private school or post-secondary school on behalf of another person, or when they pay medical expenses directly to a health care provider on behalf of another person.


Conversely, individuals may claim income tax exemptions or income tax deductions, which can reduce, or in some cases, eliminate the amount of income that is subject to tax. For example, the U.S. allows taxpayers to claim a personal exemption on their annual tax returns as well as an exemption for dependent children, both of which can reduce one’s income tax bill. On the topic of deductions, taxpayers have an opportunity to claim a standard deduction based on their tax filing status, or itemize deductions for items that may include gifts to charity, medical expenses and property taxes.


When planning for retirement, individuals should become familiar with the terms tax-deferred and tax-exempt accounts. Tax-deferred retirement accounts include 401(k)s and traditional IRAs, which allow individuals to take immediate tax deductions on the full amount of their contributions, which for 2017 is limited to $18,000 for 401(k)s and $5,500 for traditional IRAs when the account holder in under age 50.  Earnings grow tax-deferred until the account holders turn 59 ½, at which point they may take taxable withdrawals. Distributions an investor takes before reaching this age will be subject to a tax penalty.


For example, an individual at the prime of his or her earnings potential may contribute in 2017 $18,000 in pre-tax dollars to a 401(k) and reduce his or taxable income by that amount for the year.  The tax liabilities on those contributions and account growth will not be due until the individual takes distributions in retirement when he or she is potentially in a lower tax bracket and can benefit from a lower tax rate.


With tax-exempt retirement account, such as a Roth IRAs, individuals may make contributions, up to $5,500 in 2017, with after-tax dollars. This means that taxes are imposed on the contribution amount in the year it is made. However, investment growth and qualified distributions investors take after age 59½ are tax-free, as long the account has been in existence for five years or more.


The funding and tax liabilities associated with retirement accounts can get tricky when individuals consider that U.S. tax laws allow them to convert one form of an account to another during their lifetimes.  For example, a taxpayer with a traditional IRA may make pre-tax contributions for multiple years, and then convert that plan to a Roth IRA to yield the benefits of tax-free withdrawals in the future, during retirement.  The consequences of doing so, however, will depend on the individual’s unique circumstances during the year of the conversion. If it is done in a profitable year, the account owner will need to recognize taxes on the rolled-over amount and pay that liability from the assets in a non-retirement account.  In contrast, an account owner who makes a conversion in a year in which he or she incurs a net loss may instead apply those losses to offset the taxable gain of the rollover.


Individuals seeking to build and preserve wealth should first meet with experienced financial advisors to assess how their decisions fit into a comprehensive, well-thought-out plan, including the potential tax implications of their actions.


About the Author: Eric P. Zeitlin is managing director of Provenance Wealth Advisors, an independent financial planning and consulting services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call 800-737-8804 or email

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Eric P. Zeitlin is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. Financial advisors of Raymond James Financial Services are not qualified to render advice on tax or legal matters. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk, and you may incur a profit or loss regardless of strategy selected.

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Consult your tax advisor to assess your situation Converting a traditional IRA into a Roth IRA has tax implications.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investments mentioned may not be suitable for all investors. Hypothetical examples are for illustration purposes only and do not represent an actual investment.

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