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Rebalancing client portfolios can trigger tax bills: Tax Strategy Scan

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

Rebalancing client portfolios can trigger tax bills
Rebalancing is not a taxable event if it is done inside a tax-deferred retirement account, such as 401(k) and IRA, according to this article from The Los Angeles Times. However, clients can expect tax consequences if they rebalance their regular brokerage account. Investments held more than a year will be subject to lower capital gains tax rates, while investments sold in less than a year will be taxed at higher regular income rates, according to an expert. “Tax experts often recommend selling some losers to offset winners' gains, and robo advisor services that invest according to computer algorithms may offer automated tax loss harvesting to reduce tax bills,” the expert writes.

Strategies to lower taxable client income
Clients who want to reduce their taxable income this year should be creative in maximizing the tax deductions available to them, according to this article on Motley Fool. For example, they should make the most of above-the-line tax deductions such as student loan interest, as this is allowed even if they don't itemize their deductions on their returns. Clients should also max out their tax-deferred retirement contributions and invest in a tax-efficient way. For instance, high-dividend stocks should be parked in a tax-advantaged retirement account.

When to adjust paycheck withholding to avoid tax bill, penalties
Clients are advised to review their tax withholding this year, as the tax law has changed the way taxes are computed and may result in insufficient amount withheld for their tax liability, an expert for USA Today writes. "If you’re too far behind to make up the shortfall before year-end, you may need to send in extra payments to avoid a costly penalty," the expert explains. "No matter what, either solution means less money in your pocket right before the holiday season and underscores the importance of re-evaluating your tax withholdings early every year."

More than 44% of Americans pay no federal income tax
The number of Americans who will pay no taxes increased to 76.4 million, or 44.4%, from 72.6 million in 2016, before the passage of the new tax law, according to Tax Policy Center data in this article from MarketWatch. "The large percentage of people who don’t owe federal income tax is a feature, not a bug, of the revenue code,” according to the Tax Policy Center. “By design, the federal income tax always has excluded a significant fraction of households through a combination of personal exemptions, the standard deduction, zero bracket amounts, and more recently, tax credits.”

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Business owners are advised to take advantage of tax credits and deductions to boost their bottom line, an expert on Birmingham Business Journal writes. These tax breaks include the Research and Development Tax Credit, the Work Opportunity Tax Credit, the investment tax credit and the fuel credit. These clients may also use cost segregation to accelerate deductions and delay taxes.

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