Tax avoidance

Tax avoidance is a good way to save some money legally. Tax laws change all the time. Check Wikipedia on current investment taxes. Consult your tax lawyer and my knowledge in taxes is limited.

Some even went to the length by using life support to prolong the lives for several weeks so to qualify better estate tax exemption in the following year. Do not implement what I did as tax laws change frequently and every one’s situation is different. Here are what I did and hope they will be applicable to you.

·         Sold most profitable stocks that I owned more than 12 months in taxable accounts in 2011. I bought some back. I maintained a 15% tax bracket, so the tax bill from Uncle Sam is virtually 0 (not exactly due to more tax on social security and Medicare as a result of the trades). I still had to pay state tax. As a retiree, I can control my income.

I bet this is the same trick Romney and Buffett used to pay their taxes at low rates.

·          Converted part of my Rollover IRA to Roth in 2012 and 2013. I paid taxes today. However, the Roth conversion gives me tax-free appreciation for the trades in this account and it will lower tax and my minimum withdrawal requirement in the future.

·         The taxes from dividends in the retirement accounts are deferred but eventually they will be treated as regular income when they are withdrawn. Very few have higher incomes during their retirement. If you are the lucky few due to the successful investing in your retirement accounts, you may end up with higher tax bracket during your retirement, particularly when you are forced to withdraw at age 70 ½.

·         Gifted some appreciated stocks to my children. Good for them and not good for Uncle Sam. You can gift up to $14,000 (in 2015) for each spouse to each child without paying any Federal tax. For a family of four, you and your spouse can gift up to $56,000 (= 14,000 * 4) a year in 2015.

The cost basis of the transferred stock is quite complicated. Check out the current tax law. The cost basis of the appreciated stocks are carried to the receiver, so it would lower your capital taxes as most of us are in higher tax bracket than our children. 

From my experience, the cost basis of the depreciated stocks after the transfer is the market price on the transfer day as of 2016. I do not understand it enough to comment but just tell what I have experienced. I tried to offset my son’s unexpected short-term capital gain by transferring a losing stock and that does not work.

·         My lawyer set up trusts for me including my house. They will avoid probate hopefully. From the current tax law (as of 2016), the cost basis of your stocks will be stepped up or down to the stock prices of that day you pass away. Ask your heirs to keep a business paper for the stock prices or tell your brokers to adjust the cost basis on the day you pass away (send him an e-mail from hell or heaven depending on your new residence J). Of course, you have to tell your heirs now to take care of these tasks without using the described email. Again, ask your tax lawyer for details.

Make sure you specify the beneficiaries in your and your spouse’s accounts to avoid probate. Check your local state laws. Some states take more than a year to finish the probate process for a house. As of 2014, my state (Mass.) has an exemption of 1 million, not portable to your spouse, and they calculate the entire estate when it exceeds the exemption. There is no estate tax if my estate is a million dollar. I have to pay a rate on 1,000,001 if it just exceeds it by one dollar. That’s why we should move 30 miles north to New Hampshire.

I estimate that it takes about three years for the average estate to be distributed. You want to cut down the duration by having a will to start, so you do not want to pay extra to your lawyer.

·         At age 70 ½ (as of 2016), you are required to withdraw them in a schedule and it could put you in higher tax bracket. Roth withdrawal is not counted in the mandatory withdrawal for a person’s lifetime as of 2016.

·         Roth IRA if qualified could be the best deal.

·         I simulate my next year via my tax preparation software and adjust my income accordingly.

To avoid the extra tax filing such as some oil partnerships, buy them in your non-taxable accounts. 

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For more of my reasoning, check out the book described next. It has 800 pages (6*9) for $9.99. It could be the best $10 you ever spend.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.


I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.