I wanted to officially congratulate everyone for making it through another tax season.  We are now in financial freedom territory.  This means you get to keep what you earn versus it going to the government.  If you live in California, “Tax Freedom Day” was April 27th.  That means up until April, 27th, all your earnings were going to pay federal and state taxes.  On April 22nd, we did a presentation entitled “The Tax Drain”.  For those of you who missed it, I wanted to recap a few of the highlights.

We started the evening with an overview of The American Taxpayer Relief Act of 2012 and what affects it would have on the general public.  Some of the more significant changes are: The tax bracket increased from 35% to 39% for married couples earning over $450,000, with a capital gains rate increase from 15% to 20% for these same couples.  An additional tax was added on investment income which equals 3.8% and effects married couples earning over $250,000.

Historically, we are still in a moderate to low tax rate environment.  That could increase significantly in the future given the federal government deficits, so it is wise to have a tax diversification plan just as you have an asset diversification plan.  Basically, your money can be in one of three tax positions, fully taxable, tax deferred, or tax free.  If taxes do go up, you would want a significant portion of your assets in the tax free position.  There are two paths to reduce taxes:  investment vehicle selection or tax strategies.  Investment vehicle selection would be investments that have tax advantages and/or potentially produce tax free income.   Among the vehicles we commonly use are tax free municipal bonds, real estate, oil and gas and life insurance.  Most people are familiar with municipal bonds which have no federal income tax liability and can be state income tax free, and may be subject to alternative minimum tax (AMT).  High quality municipal bonds have the added benefit of having a very low historical default rate.  We also like certain types of Real Estate Investment Trusts (RIET’s) that generate income potential with a significant portion being tax-free due to depreciation and interest write-offs.  Oil and gas is less well known and can potentially generate significant up front tax deductions that can be used to shelter other income from taxes.  This is different from a retirement plan where you are deferring paying taxes into retirement.  Much of the income from oil and gas investments is also tax free due to depreciation and depletion allowances.   Lastly, one of my favorite ways to generate cash flow is via life insurance.   Most people are not aware that life insurance can be used to generate tax free income during their lifetimes, not just at death*.

Besides products, there are also various strategies to reduce your taxes.  One of the strategies I commonly use is converting a retirement account to a Roth.  You pay the tax now or over several years but you are able to grow and take out money tax-free.   A retired couple could generate 23-42% more after tax income by using this strategy**.  Charitable planning is a strategy that can be used to sell assets without paying any capital gains.  Tax deductions can be earned by utilizing various charitable vehicles such as donor advised funds, and charitable remainder and lead trusts.  There are strategies to reduce taxes by shifting income and assets to family members in lower tax brackets.  This can be particularly useful in paying for college.  If you are an executive with company stock in your retirement plan, there is a strategy that will allow you to sell the stock and pay capital gains versus ordinary income tax rates.  This could mean reducing taxes to 15% versus 39%.  If you own rental property and are looking to get out of the headaches of management, there are strategies that allow you to sell property without paying taxes and potentially increase cash flow.

If you would like to discuss how a more proactive approach to tax planning can benefit you and your family, do not hesitate to call us.


*There are additional fees and charges involved in life insurance.

**Example based upon $500,000 account growing at 8% for a 60 yr. old.  Tax rates estimated to be at 25% and also increasing to 35% after conversion.  Assume convert traditional IRA over 10 years and take income from 80-90.

IMPORTANT NOTE: Neither Innovative Wealth Strategists nor Commonwealth offer tax or legal advice. The purchase of Municipal bonds is subject to availability and market conditions. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income. Investing in alternative investments may not be suitable for all investors and involves special risks, such as risk associated with leveraging the investment, potential adverse market forces, regulatory changes, and potential illiquidity. There is no assurance that the investment objective will be attained.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at

STANDARD COMPLIANCE DISCLOSURE: Bruce Horowitz is a Registered Representative with/and offers Securities and Advisory Services through Commonwealth Financial Network , Member FINRA/SIPC, a Registered Investment Adviser. CA Insurance License #0B66129. Innovative Wealth Strategists is located at 6767 Forest Lawn Drive Suite, 120, Los Angeles, CA 90068.  This communication is strictly intended for individuals residing in the states of CA,CO,CT,FL,HI,NV,TN. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services. Please review our Terms of Use here: