Tax tips for clients with land and development plans: Tax Strategy Scan

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Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

How to reduce the tax hit on a plot of land your client plans to develop
Clients who want to reduce the tax bite on land development profit are advised to establish an S corporation in order to be the developer entity, an expert in MarketWatch writes. This strategy will enable them to see their profit taxed at no more than 23.8% in federal income tax rates, the expert explains. "Say you expect to reap another $2 million of profit from development and marketing activities," the expert suggests. "That part will be taxed at ordinary federal income tax rates, which can be as high as 40.8% (37% plus 3.8% for the NIIT) under the current tax regime."

Ways taxes on Roth IRAs and IRAs impact clients
Many traditional IRA investors are unaware that they can make non-deductible contributions to their retirement accounts, according to this article in Forbes. Unlike tax-deductible traditional IRAs, non-deductible contributions to a traditional IRA will not be subject to income tax upon withdrawal, as clients will have already paid the taxes on the contributions. When making IRA contributions, clients should consider the overall impact of federal and state taxes.

52% of older HSA participants make this huge mistake
As much as 52% of older clients who contribute to a health savings account use the vehicle only to cover near-term health care expenses, according to data from Nationwide in this Motley Fool article. This is a mistake, and clients should overfund their HSAs, according to the article. This way, the unused savings in the account will grow tax-free and clients will make the most of tax-exempt withdrawals for qualified expenses in the future.

Surprising tax changes from the IRS your clients should know
The IRS has made several tax changes that could be of interest for clients who are in, or who are approaching retirement, according to this Forbes article. The changes include a rule that now treats the health portion of genetic-testing kits as medical care; making them tax deductible as a medical expense. The IRS also included certain medical services and drugs for chronic ailments in the definition of preventive health care for high-deductible health plans, according to the article.

Tax-efficient funds with best 10-year returns
The average expense ratio among the top-performers is 40 basis points higher than the average.

How clients can use their portfolio to save on taxes all year
Clients who want to save at next year's tax season should act now while there is still time to make the needed adjustments, according to this article in U.S. News & World Report. They are advised to hold their investments for at least a year so that their capital gains will be taxed at long-term rates, which are lower than short-term rates. They should also hold the right type of assets in an investment account. For example, in a taxable account clients should hold ETFs, which are more tax-efficient than mutual funds, and municipal bonds, which offer tax-free interest yields.

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Income taxes Tax rates IRAs Roth IRAs HSAs IRS