Plan for Alternative Minimum Tax (AMT). If you have high income this removes your AMT exemption and then you may have AMT tax.
Prepay/bunch up deductible items if possible by paying for two years of deductions in one year.
Charitable donation of IRA direct to charity: Be ready to respond to a possible unknown new law allowing charitable donation of your IRA direct to charity which would be more efficient than liquidating the IRA and sending the cash proceeds to the charity because it wouldn’t flow through and expand your Adjusted Gross Income (AGI). AGI is used to trigger various thresholds, so a lower AGI can be beneficial. If you liquidate an IRA you raise AGI even if you get a deduction on Schedule A for donating the proceeds. Then the higher AGI may result in a reduction of deductions on Schedule A or a reduction of exemptions, raising your tax.
Get health insurance so as to avoid the new ACA health insurance penalty tax.
The 3.8% healthcare investment surtax (NIIT) tax affects investment income for married people with AGI over $250,000 (singles at $200,000). Even if you have deductions on Schedule A this tax ignores those deductions, so in some cases a person with huge medical expenses and a small amount of investment income could pay no income tax except the NIIT, assuming his AGI was over $200,000 (single or $250k married). Muni bond interest is exempt from NIIT.
Put more into retirement accounts including non-deductible after-tax contributions to 401k or IRA. The withdrawals from retirement accounts are not taxed by NIIT tax. Be careful because the best tax break is to be able to use long term capital gains, which is not allowed for retirement accounts.
Regarding the trade-off between when to take Social Security and when to draw on an IRA, it is usually best to wait until 70 to start drawing Social Security so as to get the maximum benefit. This is important because it is inflation adjusted so you get more value by simply getting the highest initial payment. Retired people in their sixties should consider trying to be in a lower tax bracket by refusing Social Security until 70 and then carefully spending down their traditional IRA when they have lower income then after age 70.
If working, remember to max out your 401k contribution. Consider doing a Roth conversion if you are in a moderate tax bracket.
The best tax planning is when someone is retired and can move around various variables such as deciding when to take capital gains or Social Security. The ultimate best strategy is to hold investments for your life because no capital gains tax is due when someone passes on. The problem is that companies may degenerate at a faster pace than in previous generations so the idea of buying a stock and holding for 40 years may be far less practical. One researcher claimed the average company only lasts 17 years and 40 years ago they lasted about 50 years. This risk can hurt Deferred Compensation programs where the employer holds your income in a 20 year deferral subject to the risk of the employer going bankrupt. In an era of Lehman, GM, Chrysler, WAMU, etc. failing I would be reluctant to have a Deferred Compensation program.
Other tax ideas are to buy oil drilling ventures that provide a wrote-off but unfortunately these may be of dubious quality with the risk of a business failure due to declining oil prices. If your AGI is under $150,000 you can deduct a maximum of $25,000 for actively managed rental real estate losses. You could lower AGI with an oil drilling partnership and a 401k contribution.
Master Limited Partnerships (MLP’s) seem interesting but I don’t recommend them. If you want to own them be sure never to hold them in a retirement account or serious tax penalties (for earning UBI in a retirement account) could result.
Remember that at the last week of December some mutual funds issue a surprise distribution of capital gains which could disrupt your plan to stay below a certain tax bracket.
Some Muni bond mutual funds try to boost yield by buying higher yielding taxable Muni bonds in a fund with a blend of regular tax-exempt Munis. Then a naïve investor finds out that he has more taxable income after the tax year has closed.
Keep Treasuries out of IRA’s because their interest is free of state income tax if in a non-retirement account but becomes taxable if it is in an IRA or 401k, unless it is a Roth.
To get the best dividend tax rate you need to have owned a stock at least 61 days before and after the dividend date otherwise it becomes taxed at the higher ordinary rate. This benefit is lost if dividends were earned in a retirement account.
Investors need independent financial advice about tax planning. I wrote an article “Tax season inspires a new look at tax planning.”