Keeping More of Your
Investment Profits
Careful planning can help you avoid sharing too much of your profits with the tax collector when he comes knocking at your door. While a tax bill may not be avoidable, the amount owed can often be minimized through the use of carefully constructed strategies. Below are some of the more common approaches tax professionals use to help their clients lower their taxes:
If you sell stocks at a profit, you face a 35% or more tax
on your gain under the new Israeli tax code. However, if you sell some stocks
at a loss, and some at a gain, you can offset your gains against your losses
and only owe tax on the net gain. For example, if five of your stocks did well
and you sold them for a total profit of $10,000, you might owe $3,500 or so in
taxes. During the same year, however, had you sold stocks at a $9,000 loss,
your net gain would be $1,000. Therefore, 35% of your net gains would result in
a tax bill of $350. So think carefully about your poorly performing stocks. If
you hold onto them waiting for the day that they might recover (and if they
never do), you could be cheating yourself out of a big tax savings.
Often, it's difficult to manage a diversified portfolio in order to maximize tax efficiency. That’s why some people turn to a professionally managed account. Top-tier institutional money managers can often help lower the tax bite by focusing on selling the right securities at the right time. Normally, these managed accounts require a $100,000 minimum investment. If your portfolio size qualifies, you might find it prudent to investigate such a management program to see if it is right for you.
Choosing
the source of your funds
Though the definition of a pension plan remains unclear
under the new tax regime, it would appear that your IRA (your U.S. personal
retirement plan) can continue to grow tax-deferred until you take
distributions. A regular portfolio of stocks and bonds, however, would be
subject to taxation whenever you have capital gains. Therefore, if you plan to
fund your retirement by drawing off your savings, it may be a good idea to
start by depleting your taxable portfolios. Since the IRA can continue to grow
tax-deferred, you may as well leave your money in that type of account as long
as possible. Don't forget, though, if you are over 70 1/2, you must take
mandatory withdrawals from your IRA, regardless of whether you have taxable
accounts that you’d prefer to use first.
Deductions
Salaried employees in Israel normally have income tax
automatically withheld from their wages. While you cannot change the amount
withheld, there are deductions that you can take. Specifically, donations to
recognized charities are deductible. Since an employee cannot just give tzedaka
and tell his boss to withhold less tax, there is a form that can be submitted
to the tax authorities with receipts proving charitable donations were made.
Within certain guidelines, then, you should receive a tax refund of up to 35%
of the value of your donations.
Also, make sure your employer’s records are up-to-date
about the number of children you have, your marital status, and where you live,
since these can affect your tax bill.
Work
savings plans
Often employers offer their employees a bituach
minahalim policy. This savings plan is made up of three components:
savings, life insurance, and disability insurance. Speak to the human resources
division representative of your company or to an insurance agent to review your
plan and make sure you are contributing an appropriate sum in each of the
categories.
An important aspect of the bituach minhalim plan is
that it is funded by pre-taxed money. That means that if NIS 2000 per month
gets funneled into your bituach minhalim plan, you don’t pay taxes on
those funds. And, there are no taxes on the growth of the funds within the
plan. Any money invested in a bituach minahalim works double-time
for you, increasing the amount of money you actually save.
A trust is an investment tool that allows you to separate
yourself from your money in a legal sense while, depending on the type of
trust, maintaining control of the assets. If you put your money in a
trust, then the trustee, who can be you and/or other persons or entities, can
direct how the money is invested, used, and distributed. Different types of
trusts are designed to provide different types of benefits, including the
minimizing or, in some cases, the eliminating of certain taxes. The way taxes
on a trust get assessed depends on the structure of the trust and on its
documentation. If you are the beneficiary of a trust or are planning to create
one, be sure to consult a qualified tax advisor to clarify your situation with
regard to the new tax reform regulations.
There are several compelling reasons today to consider
placing your assets into a trust. These include:
·
Protecting
yourself or your family from creditors
·
Controlling
the amount of estate tax that will be due on your assets (relevant for U.S. citizens
as Israel does not yet have an estate tax)
·
If
you are parents of minor children, establishing an income stream for them in
the event of your joint demise
·
Keeping
irresponsible adult children from having unlimited access to an inheritance
·
Avoiding
probate (assets in a trust usually do not pass through the long and expensive
probate a process)
Tax laws are complicated and everyone’s situation is
different. The information supplied above should be used as general guidelines,
not as specific tax advice. See a qualified tax attorney, accountant, or
financial planner for more details on how to retain your investment profits.
Douglas Goldstein is the director of Profile Investment Services,
which sponsors this section. He is a licensed financial professional both in
theU.S. and Israel, and helps people who invest in the U.S. He is a member of
the Financial Planning Association, and offers securities through Portfolio
Resources Group, Inc. a registered broker dealer, Member NASD, SIPC, SIA. For
more information, go to www.profile-financial.com or call (02) 624-2788 or (03)
524-0942.