Tax Planning Strategies in the Carolinas

Writing note showing Tax Planning. Business concept for analysis of financial situation or plan from a tax perspective White pc keyboard with note paper above the white backgroundProfessionals and business owners in the Carolinas face complex state and local taxation issues even as they deal with the dynamic federal tax law that changes yearly. At the same time, taxing authorities have become more sophisticated in pursuing tax cases, and new case law has created potential reporting obligations for businesses operating in multiple jurisdictions. 

There was never a better time to seek professional support for incorporating tax planning strategies in the Carolinas into your overall financial plan. 

If you are approaching or have reached retirement, our retirement advisory firm in Greenville, SC, can provide you with the expertise you need to protect your wealth by minimizing your tax burden while fulfilling all your legal obligations. 

Chapter 1

Tax Planning in the Carolinas

Our goal for tax planning in South Carolina and North Carolina is to allow you to pay the lowest legally-required amount possible on federal, state, and local tax returns. Success requires a reduction of your tax liabilities while maximizing your contributions to IRAs and qualified retirement accounts. 

In particular, efficient tax planning considers the size and timing of income, purchases, and expenditures. Popular tax planning techniques include contributing to retirement accounts and investment tax gain/loss harvesting.

Tax planning starts with your tax bracket: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These are marginal brackets measuring the taxable percentage of the “last” taxable dollar you earn for the year. One objective of tax planning is to move you to a lower tax bracket by reducing your taxable income and increasing your year’s deductions, credits, and allowances.

Tax deductions reduce your taxable income, but tax credits are better because they directly reduce your income tax bill. You’ll have to decide whether to take the standard deduction (which speeds up tax return preparation) or itemize your deductions if they exceed the standard deduction (in 2022, that’s $12,950 for single filers $25,900 for married filing jointly).

Some tax strategies prefer itemization, such as owning an expensive home and paying a lot of deductible mortgage interest. Even if you use the standard deduction on your federal return, you can choose itemization on your state return. There are hundreds of deductions and credits available at the national level.

Although the details differ substantially between the two states, North and South Carolina share similar tax structures. Your tax planning must encompass state and local taxes, including those on income, property, estates, and sales. 

Tax gain/loss harvesting is a portfolio’s strategy to offset capital gains. Long-term gains must first offset long-term losses, and the same rule applies to short-term profits. If your losses exceed your progress, you may deduct up to $3,000 of losses against ordinary income and then carry the excess forward. The long-term capital gains rates range from 0% to 20%. 

The income tax structure of South Carolina, where the state’s income tax rate tops out at 7%, aligns closely with the federal income tax laws. When filing your state return, you will face a few modifications to your federal deductions, exemptions, and adjustments. 

Both North and South Carolina require you to file returns if you also file a federal return. South Carolina does not tax you for intangibles or the sale of an out-of-state property. The federal capital gains laws for the sale of your residence also apply to the state tax procedures. Currently, the deduction for net capital gains held for at least two years is 44%, reducing the effective tax rate to 3.9%.

Chapter 2

Navigating Yearly Tax Law Changes

Without fail, every year ushers in some changes to federal tax law. Some states also update their tax rules frequently, and tax cases may require further changes. The complexity of the tax laws can be overwhelming, compounded by any new rules added or old rules deleted or changed.

EvenTop view of income tax forms with new changes plus piggy bank on more daunting, the tax changes aren’t limited to the income tax, and you may also face estate, sales, property, and business taxes. This tax smorgasbord is why our investment advisors in Greenville, SC, constantly review changes to tax laws.

Our tax experts and financial professionals subscribe to newsfeeds, publications, and articles about taxes, hold internal training sessions, attend seminars, and take continuing professional education courses each year to ensure we’re on top of the latest tax information. 

Our scope of interest spans both individual and company owners. High-income earners face unique challenges when minimizing taxes, but they also have many opportunities to garner tax breaks through sophisticated strategies. 

We advise professionals and owners on various tools to lower taxes, including:

  • Emphasis on capital income over ordinary income
  • Asset-based borrowing against your portfolio
  • Holding assets for heirs who benefit from the basis step-up 
  • Wealth transfers through trusts, charitable gifts, and donor-advised funds
  • The use of offshore legal accounts
  • Utilizing tax-advantaged investments 

These and many other techniques are subject to legislative and judicial changes that must be continuously monitored. Our clients are busy people who trust us to give them the most timely advice regarding their taxes, investments, and retirement plans. We are committed to providing our clients the finest fiduciary care, including navigating changes to the tax laws.  

Chapter 3

Tax Planning Strategies Before Retirement

Tax planning is one of the best tools to increase your retirement income. To maximize the value of tax planning, you must begin well before you retire. 

The basics include reducing your taxable income through tax-deductible contributions to your retirement accounts. At the federal level, you can deduct contributions of up to $6,000 ($7,000 if at least 50 years old) to your traditional IRA, and you must complete your IRA contributions before April 15 of the following year. You can also deduct $20,500 of income (plus another $6.500 if you’ve reached age 50) contributed to traditional 401(k) and 401(b) accounts. 

You can diversify your tax liability by directing some of your retirement contributions to Roth accounts. Even though you don’t get an immediate tax deduction, your earnings grow tax-free, allowing future tax advantages. 

You can reduce capital gains, taxable interest, and dividends in your current taxable accounts using tax-efficient (like low turnover) index funds, tax-free bonds, low-dividend stocks, and sophisticated futures contracts, to name a few. 

Charitable giving can produce large deductions that may push you into itemizing rather than the standard deduction. Some taxpayers benefit from bunching their philanthropic gifts into biannual donations rather than giving a lesser amount each year. Bunching can also work if you donate to a donor-advised fund. 

You may want to consider cash-value life insurance to reserve funds for retirement that you can access through withdrawals or borrowings. The money you borrow from an insurance product is tax-free, so paying for a policy now leverages lower taxes in retirement. Life insurance policies are beneficial if you’ve maxed out your retirement account contributions.

The fixed-index annuity is another life insurance product that allows your principal to grow tax-deferred. This type of annuity guarantees a set minimum income level and protects against losses since you’ll receive your inflation-adjusted payout even when the market tanks.

Choosing the right insurance products is essential to reduce specific problems, including complexity, high fees and expenses, and illiquidity.

Chapter 4

Tax Planning Strategies For Retirees

Question Mark With Text Of 401k, Roth And Ira

Once in retirement, your goal is to ensure you don’t outlive your money while enjoying your desired lifestyle. Part of that task is to continue to minimize your taxes. If you have Roth accounts, you already have a source of tax-free income. 

You can also borrow from your 401(k) and cash-value insurance policy tax-free. If you have an annuity, you pay taxes only on the portion of your payout attributable to earnings rather than contributions. 

Postponing or avoiding your required minimum distributions can be worthwhile. Traditional IRAs and qualified retirement accounts require you to take RMDs at age 72. The amount of the RMD is based upon the account balance and your expected lifetime. 

Some individuals choose to convert their traditional account to a Roth IRA and pay all the tax at one time. Roth IRAs do not have RMDs and are thus helpful for estate planning.

You can discharge your RMD obligations and save on taxes through qualified charitable distributions (QCDs) from an IRA once you reach age 70 ½ (not 72!). You cannot deduct QCDs, but don’t include them in your taxable income.

A qualified longevity annuity contract (QLAC) is an annuity within a retirement account exempt from RMD calculations. You can postpone taking QLAC payments up to age 85. These taxable payments satisfy a portion of the account’s RMD requirements. QLACs do not have a cash value until you annuitize them (assuming you live to the targeted age) and may have high fees. 

As a leading retirement advisor in Greenville, SC, we can advise on these and many more strategies to help retirees save on taxes. 

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Chapter 5

How to Plan for Taxes When Relocating to the Carolinas

North and South Carolina impose income tax on individuals but offer some interesting deductions. It’s a good idea to understand each state’s tax rules so that you can take advantage of certain unique deductions, credits, and adjustments.

South Carolina

In South Carolina, you must file a state income tax return. The maximum state income tax rate is 7%, one of the country’s highest. You can deduct $3,000 of retirement income before age 65 and $10,000 after that. Moreover, all residents can take a tax deduction of up to $15,000 on income from any source, offset against your retirement income deduction. 

South Carolina offers various state income tax deductions, including retirement income, disability, young children, and interest earned on federal debt instruments. The state provides tax credits for out-of-state income taxes, in-state college tuition, households with two working spouses, and specific nursing care costs.

When coming to South Carolina, bear in mind the other taxes you may face, including sales tax ranging from 6% to 9% depending on where you live within the state, local property tax with an average effective rate of 0.55%, a 26-cent gas tax, and taxes on cigarettes and alcohol. The state’s estate tax is the amount claimed as a state credit on your federal estate return. 

North Carolina

Residents of North Carolina who file a federal return must also file one for the state. The state has a flat 5.25% state income tax rate,  applicable to ordinary income and capital gains. Deductions apply to interest received on U.S. debt obligations, a limited amount of qualified home mortgage interest and real estate property taxes, and charitable contributions deducted on the federal return.

Retirement distributions to federal and state retirees are exempt from state income tax. Other retirement income is taxable.

The state and county sales tax rates range from 6.75% to 7.50% but are lower for aircraft and boats. There is also a use tax for out-of-state purchases. You can expect an average effective property tax rate of 0.77%. The gasoline tax is $0.361 per gallon. 

North Carolina does not impose any estate tax, but there is an excise task for possessing unauthorized substances. The cigarette tax is 45 cents per pack. Alcohol is taxed at the standard sales tax rate. 

Chapter 6

Social Security and Medicare Taxes

Diagram of medicare

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You must pay a 3.8% Medicare surcharge when your adjusted gross income (AGI) exceeds $200,000 for the year ($250,000 for joint filers). You can exclude income from partnerships, municipal bonds, and S Corporations (if you actively participate). 

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You can also exclude some types of rental income and the capital gains for selling a business. If you are near the threshold income level, it might make sense for you to postpone realizing a significant capital gain. 

For instance, you might delay the sale of your home to the following year. Tax-loss harvesting and maximizing retirement plan contributions can also help you from triggering this surcharge.

The strategy also comes into play when considering taking Social Security benefits. If you wait until age 70, you’ll avoid paying taxes on the benefits until then, and you’ll lock in your maximum benefit amount. 

If you don’t need Social Security benefits to support your retirement lifestyle, consider contributing to a qualified charity to reduce the tax impact.

Modern investment management isn’t what it used to be. Certified financial planners in the Carolinas are ready to help you assess your net worth. Because we’ve seen the consequence of real-world mistakes in planning taxes and planning estates, we leverage our experience to help our clients make the right choices proactively.