Reducing Taxes and Investing for Growth, a Strategy for Both Goals

Let’s discuss tax reduction strategies and alternative investments. It is hard to accomplish both tasks, reducing taxes while making an investment for gain, but it is important to note that there are opportunities available to investors. Let me present two options to consider.

Most investors want to reduce income and pay less tax where possible. There are a lot of tax reduction strategies available, too many to list here, but one thing they have in common is the goal to reduce taxable income in 2024. Investors may consider an investment into oil and gas for the Intangible Drilling Cost deduction which has historically been 70-90% of an investment. That means that $100,000 investment will result in a deduction ranging from $70,000 to $90,000 and depending on the effective tax bracket of the investor, that can save them quite a bit of money in taxes. In year 2 of the investment, the investor is typically moved to a Limited Partner and income begins to be dispersed on a quarterly basis as passive income. This is very attractive to investors that have passive losses from sources like real estate and don’t have a way of using those losses on their tax returns. Now those investors can offset their passive losses with passive income that makes the oil and gas distributions very tax favored even when not accounting for the depletion allowance.

Investing in oil and gas is one example of reducing taxes via and making an investment for growth and income. There are many others as I have mentioned, but let’s now think about how to mitigate taxes when converting from an IRA to a Roth IRA. The conversion is taxed as ordinary income and tax will be due at your effective tax bracket. Depending on the size of the IRA and conversion, this transaction may push you into the higher tax bracket making the conversion even more expensive. In conversations with clients these are some of the reasons why they haven’t converted, decided the conversion was too expensive, their kids can pay the tax due when they inherit the money, they are okay with the current RMD situation and hope tax rates don’t go up in the future, others have taken the approach to convert smaller amounts per year and stretching out the process over many years. The impetus behind making the conversion from an IRA to a Roth may be financial, emotional, legacy driven, etc, but finding a way to mitigate the tax is important to help investors achieve their goals. A creative way of using an alternative investment as a tax deduction is utilizing the J-curve. Please see below for the description of a J-curve. Like oil and gas, a J-curve can be advantageous for IRA owners that want to convert to a Roth, mitigate the taxes on the conversion, but still invest in an alternative investment vehicle like private real estate with the growth being realized as tax-free.

Reach out to me and we can discuss either one of these two strategies and how they can have a positive impact on reducing your taxes for 2024.