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Investment tax shock — how clients can avoid the pain: 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 avoid investment tax shock
Clients are advised to choose a new investment carefully, prepare their tax returns promptly and hold a cash reserve to cover a surprise tax liability, according to U.S. News & World Report. For example, investors who have MLPs in IRAs and invest in REITs are likely to face tax bill. Moreover, reinvested dividends could boost their tax bill if they fail to monitor these reinvestments. "Keeping track of reinvested dividends is particularly important if you own a stock or fund for a long time and reinvest dividends along the way," an expert says.

Strategies to simplify taxes in retirement
Instead of making quarterly tax payments, retirees have the option of having the payments withheld from their Social Security and pension benefits, according to CNBC. Retirees who reach the age of 70 1/2 may use their required minimum distributions to cover their tax liability. Those who take this option should advise their custodian to withhold enough to cover their taxes so the IRS will treat the withheld amount as payment. Moreover, clients should remember that an RMD is considered a taxable income. “People forget to account that the RMD is taxable and must be included in the tax calculations,” according to an expert.

Maximizing the tax benefit of charitable donations
As the increase in standard deduction makes charitable tax deduction less valuable under the new tax law, there are other ways that taxpayers take advantage of the tax break, a CFP writes at Palm Beach Post. One tax-efficient option is through charitable advertising, as they can deduct the cost of the ad as a business expense, writes the expert. Another option is to donate appreciated securities to charity, as they won't face a tax bill on the capital gains if they opt to sell these holdings.

Should clients pay down the mortgage or invest?
Clients will be better off prepaying mortgage if they cannot find investments that provide better guarantee returns, a Morningstar expert writes. Mortgage prepayments are also recommended if they are in the later years of their debt and collecting minimal benefit from interest tax deduction, the expert writes. "Meanwhile, people with new mortgages, where interest composes most of the payment and accordingly enlarges the deduction, had less of a reason to prepay."

A majority of affluent Americans are likely to adjust their financial plans under the new law, according to the AICPA. Here's how advisors can help.
April 19

6 tax breaks for college costs
The American Opportunity Tax Credit and The Lifetime Learning Credit are among the tax breaks that parents can claim for college education expenses, according to this article on Kiplinger. Clients can also incur tax savings on college costs by contributing to 529 savings plans, investing in tax-free savings bonds and taking advantage of the student-loan tax deduction. Getting a scholarship is another tax-free option for clients in need of funds to cover education expenses.

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