Tax Planning

Minimize the Effects of Taxes Through Year-Round Planning

Paying only the taxes you truly owe makes perfect sense. Yet many investors essentially miss the opportunity to reduce their tax burdens by not planning ahead.

Minimizing the effects of taxes calls for year-round planning – planning that begins with an in-depth understanding of your financial situation. That’s where Raymond James financial advisors can help. We can assist you with creating and monitoring a financial plan that is sensitive to tax issues and that can adapt to changes in your lifestyle or tax laws. As you review investment alternatives and services for your portfolio, you may want to consider tax-advantaged solutions that are targeted to specific segments of your overall financial plan.

Retirement Planning

The solvency of Social Security continues to be a major concern for Americans and having personal savings to rely upon in retirement has become more important than ever. Of course, making contributions to any company-sponsored retirement plans for which you may be eligible is a good idea, since doing so helps you save while reducing your taxable income. In addition, exploring other tax-advantaged alternatives may also help you prepare for the future while providing current benefits.

“Anyone may so arrange his affairs that his taxes shall be as low as possible. He is not bound to choose that pattern which best pays the Treasury. Everyone does it, rich and poor alike, and all do right; for nobody owes any public duty to pay more than the law demands.”
– Former U.S. Appeals Court Justice Learned Hand

Individual Retirement Accounts (IRAs)

IRAs are investment plans designed to encourage retirement planning and savings. You can direct funds to virtually any investment alternative through a self-directed IRA, enabling you to balance your current financial needs with retirement savings objectives. Up to $4,000 may be contributed annually to all combined IRAs in 2006, with those aged 50 or over eligible to add an additional $1000 “catch-up” amount, bringing their annual total to $5,000.

Traditional IRAs

Anyone under age 70½ with earned income can contribute to a traditional IRA and some taxpayers can receive a full or partial deduction for their contributions. However, there are several distribution regulations:

  • Required minimum distributions must begin by April 1 of the year following attainment of age 70½,
  • Ordinary income tax rates may apply to the entire distribution, including the original tax-deductible contribution and earnings, and
  • A 10% penalty applies to distributions made before the participant is 59½, with certain exceptions.

Roth IRAs

In contrast to traditional IRAs, Roth IRAs do not limit participation by age; instead, income thresholds – $110,000 for individuals filing singly and $160,000 for married individuals filing jointly – are used to determine eligibility. In addition, contributions are not tax-deductible.

Earnings on both traditional and Roth IRA contributions accumulate on a tax-deferred basis; however, Roth IRA contributions and earnings are tax- and penalty-free upon withdrawal if the participant is age 59½ or older or certain other requirements are met.

As an added benefit for some, Roth IRAs do not require that distributions begin at age 70½; instead, you may continue to defer tax on Roth IRA earnings throughout your lifetime.


Many investors favor tax-deferred annuities because their earnings – including all interest, dividends and capital gains – grow and compound tax-deferred until withdrawal.1 In addition, there is no annual limit to the amount of money that can be put into a non-qualified annuity.

1For both types of annuities, tax-deferral is until funds are withdrawn, at which time they may be subject to income taxes and, prior to age 59 1/2, a 10% federal penalty tax may apply. Variable annuities are long-term investment alternatives designed for retirement purposes. Withdrawals from annuities will affect both the account value and the death benefit. For variable annuities, the investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Guarantees are based on the claims-paying ability of the issuer.

Fixed Annuities

Fixed annuities are insurance contracts that are guaranteed by the insurance carrier to provide a certain amount of money at a specified time in the future. You make a single or series of premium deposits and the earnings on the deposits grow on a tax-deferred basis. When the contract matures, you can elect to continue it, surrender it, or receive the income payment’s value and pay taxes.

Variable Annuities

Like the fixed annuity, all earnings in a variable annuity compound tax-deferred. However, rather than offering a fixed-rate guarantee, variable annuities provide a choice of several separately managed accounts and offer tax-free transfers among the portfolios. Therefore, investors may adjust their portfolios to changes in market conditions or to changes in their individual financial objectives.

Investors should carefully consider the investment objectives, risks, charges and expenses of variable annuities before investing. The prospectus contains this and other information about variable annuities. The prospectus is available from your financial advisor and should be read carefully before investing.

Education Planning

As the cost of tuition continues to rise, funding a child’s education has become an increasingly common long-term savings goal. There are a number of alternatives that work to accomplish education savings objectives while providing tax benefits.

529 College Savings Plans

Having gained extreme popularity in recent years, 529 college savings plans offer several unique advantages. In addition to unlimited eligibility requirements, flexible contribution and donor income limits, control of how funds are allocated, and the ability to use funds at any qualified U.S. school and some foreign institutions, federal tax advantages are a major benefit of investing in 529 plans. Earnings grow tax-free and qualified withdrawals are also tax-free when used for qualified education expenses.

In addition, families are generally free to use a plan from any state. However, while federal tax advantages are standard, state treatment varies. Many states don’t impose state tax on earnings or on qualified withdrawals from both in-state and out-of-state plans, but that’s not uniformly true. Some allow for tax-deductible contributions for residents of the state sponsoring the plan, others don’t. In addition, deductions vary.

Of course, with any type of college savings program, there are other considerations. For example, earnings on withdrawals from 529 college savings plans that do not meet certain requirements are taxed and subject to a 10% penalty, so it is important that assets placed in these plans be used for higher education.

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts help pay for the higher education, as well as private elementary and high school expenses, of a designated beneficiary. The beneficiary does not have to be an immediate family member, but must be under age 18. All funds in the account need to be distributed within 30 days after the beneficiary turns 30.

Accumulated earnings grow tax-deferred, with distributions free of tax as long as the money is used for qualified education expenses. In addition, should the beneficiary not need the funds, or if an excess of funds remains after paying for college, the account may be transferred to certain specified relatives of the original beneficiary.

UTMA Accounts

The Uniform Transfer to Minors Act (UTMA) may also be an appropriate method to help save for college and assist with tax planning.

Generally, UTMAs are opened by parents or grandparents who act as custodians. The custodian controls the investment and disbursement of funds until the child reaches the age of maturity – 18 or 21, depending upon the state of residence – at which point he or she controls the money.

With the UTMA, almost any type of investment can be made, with growth and income generally taxed to the child. Often, this method of taxation results in considerable savings, as the child – who actually owns the assets in the account – may have special tax advantages over the parents or grandparents.

Estate Planning

Estate planning is the process of naming the beneficiaries to whom you want to pass your wealth while managing the related estate tax consequences. In addition, some estate planning strategies can help you minimize current taxes, as well.

Charitable Giving

Tax law allows for an unlimited charitable deduction to encourage giving. While this deduction has no limit for gift tax purposes, there are limitations on the deductions available for income tax purposes. Through the Raymond James Trust Companies, we can provide several alternatives that allow you to help your favorite organizations while also benefiting your family and yourself.

The Charitable Remainder Trust

Generally, gifts to charities are made in cash, but there can be advantages to contributing highly appreciated assets such as stock or real estate. By transferring these assets to a charitable remainder trust, you can give generously to a favored charity and enjoy several additional advantages, including creating regular income for a period of years or for life, receiving a charitable deduction for income tax purposes for up to five years after the gift is made, and reducing or eliminating estate taxes. One of the biggest advantages, however, is the avoidance of capital gains on trust assets.

The Raymond James Charitable Endowment Fund

A charitable endowment fund can simplify the power of giving by making grants to charitable organizations on your behalf. As a tax-qualified public charity, the Raymond James Charitable Endowment Fund’s benefits include:

  • An immediate tax deduction for gifts made,
  • No capital gains tax on securities held within the fund,
  • No estate taxes on fund assets,
  • Growth potential for your gifts, and
  • Your own private foundation without administrative worries.

The Raymond James Pooled Income Funds

Pooled income funds, also know as life income funds, provide tax advantages at the time of contribution, as well as ongoing benefits. Among the benefits of the Raymond James Pooled Income Funds are:

  • Investment income for life,
  • Avoidance of capital gains on highly appreciated securities, I Immediate tax deductions, and
  • The ability to simply create a legacy of giving.

Gifting of Assets

The annual gift tax exclusion allows you to give a gift of $12,000 for 2007 – in cash, property or a combination of the two – to as many people as you wish each year, without paying any gift tax. If a married couple makes joint gift, the exclusion is doubled to $24,000. This strategy may reduce your taxable estate, but neither the gift nor the gift income to the recipient is deductible for income tax purposes.

Investment Planning

The most common types of portfolio income include interest, dividends and realized capital gains. There are numerous strategies for allocating an investment portfolio to reduce tax obligation; however, it is important to remember that the tax benefits of investments are just one factor that should be considered when establishing an appropriate investment mix.

Interest Income

Interest income is most often associated with fixed income investments, and converting taxable investments such as corporate bonds into federally tax-free municipal investments can dramatically increase an investor’s after-tax interest income. In addition, municipal issues are usually tax-free for residents of that state, although they may be subject to local taxes, as well as the alternative minimum tax (AMT).

The key is the “taxable equivalent yield.” The taxable equivalent yield translates the yield on a municipal bond into the equivalent yield for a taxable bond, helping you determine which investment makes the most sense for your portfolio.


One of the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) included changes in how dividends from domestic corporations and qualified foreign companies are taxed. While, in the past, dividend income was counted as ordinary income and taxed according to an individual’s tax bracket, the maximum rate on qualifying dividends has now been dropped to 15% for most investors. For those in the 15% or 10% bracket, qualifying dividends are subject to a maximum tax of only 5%.3

3There are certain rules that apply to this preferred treatment, including minimum holding periods and specific types of dividends that are excluded. In addition, the lower tax rates on dividend income will expire at the end of 2008 unless the changes are made permanent by Congress.

Capital Gains

JGTRRA also made significant changes to the taxation of capital gains. Profits on capital assets held longer than 12 months – or long-term capital gains – are taxed at a maximum rate of 15%. Taxpayers in the 15% tax bracket or lower pay federal capital gains taxes at a 5% rate. Capital gains and losses can be netted against each other to reduce taxable income. Short-term gains are compared to short-term losses and the same method applies to long-term gains and losses. This provides potential for offsetting capital gains, thereby reducing taxable income.

The Alternative Minimum Tax

The alternative minimum tax was created by Congress to help ensure that taxpayers – both individual and corporate – do not escape taxation through creative accounting and “over-use” of tax benefits provided under the regular tax system.

This alternate computation must be used when regular taxable income is excessively reduced by relying on so-called tax preferences. While Congress didn’t intend for the AMT to apply just because of realized long-term gains, a large realized capital gain may cause the AMT to apply. Techniques used to lower regular income taxes – such as large exclusions or deductions from taxable income – may also cause AMT consequences.

The AMT is actually part of a separate, parallel tax system with its own rules for determining taxable income, exemptions, deductions and credits. With it, a flat 26% to 28% tax rate is applied to income, adjusted upwards by the preferred items that are used to reduce liability excessively. If this amount is higher than your regular tax bill, you pay the higher amount.

The interaction between the AMT and the regular tax system can make multi-year tax planning difficult. For this reason, it would be wise to consult a tax professional if you intend to engage in any significant tax planning strategy. He or she can help you determine whether you risk triggering the AMT, and help adjust your strategy appropriately. As Raymond James financial advisors, we can also help with any questions you may have about the AMT as it relates to your overall financial plan.

A Team Approach to Tax Planning

All tax planning strategies involve one or more non-tax financial planning implications; the key is taking advantage of those that are consistent with other objectives. Any investment decision should be made with priority placed first on suitability, next on the fundamental economics of the investment and then, finally, on potential tax considerations.

In addition, tax planning is a year-long activity, not simply one that should be addressed immediately before tax time. With our help, as well as the assistance of tax and legal professionals, you can create a financial plan that considers taxes as part of a comprehensive, ongoing approach to help you reach your goals.

Any investment decision should be made with priority placed first on suitability, next on the fundamental economics of the investment and then, finally, on potential tax considerations.

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