According to a recent article published by Kiplinger in December , it's important for retirees and soon-to-be retirees to consider the impact of year-end tax and investment decisions on their Social Security benefits. For example, if retirees have substantial taxable income in a given year, it can result in higher taxes on their Social Security benefits. On the other hand, by making strategic investment decisions before year-end, retirees can reduce their taxable income and potentially avoid higher taxes on their Social Security benefits. This information is particularly relevant to our target audience of Caterpillar workers looking to retire and existing retirees who may be looking for ways to optimize their retirement income.

What Are Year-End Investment Decisions?

Numerous Caterpillar customers have concerns concerning tax planning and end-of-year investment decisions. Tax planning may enable you to control the timing and manner in which you report your income and claim your deductions and credits, whereas year-end investment decisions may result in substantial tax savings. The fundamental year-end planning strategy that we would like to share with our Caterpillar clients revolves around timing — timing your income so that it is taxed at a lower rate, and timing your deductible expenses so that they can be claimed in years when you are in a higher tax bracket. In terms of investment planning, investing in capital assets may increase your ability to time the recognition of a portion of your income and enable you to take advantage of potentially lower-than-normal income tax rates. You have the option to determine when the income or loss from a variety of investment assets is recognized. In most cases, you decide when to sell your capital assets, but Caterpillar clients should be aware that shifting prospective capital gain income to other taxpayers through gifting may be an appropriate strategy in certain circumstances.

How Do You Use The Capital Gains Tax To Lower Your Taxes?

Our Caterpillar clients frequently inquire about capital gains tax deductions. Capital gains and losses are taxed in a unique manner. Currently, the maximum long-term capital gains tax rate (for most asset categories) is 20%, while the maximum ordinary income tax rate is 37% — a difference of 17%. It is essential for our Caterpillar customers to remember that converting ordinary income to long-term capital gain income may result in a reduction of your federal income tax liability.

Tip: Long-term capital gains are generally taxed at special capital gains tax rates of 0%, 15%, and 20% depending on your taxable income. The actual process of calculating the tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income.

Additionally, the 3.8% net investment income tax applies to some or all of your net investment income (including capital gains) if your modified adjusted gross income exceeds $200,000 for single or head of household filers, $250,000 for married taxpayers filing jointly, or $125,000 for married taxpayers filing separately.

Timing Your Capital Gain Recognition

If our Caterpillar clients time the sale of their capital assets judiciously, they may be able to reduce their federal income tax liability. If it's late in the year and you want to sell a capital asset, you can wait until January to do so (assuming you have a calendar tax year) so that you realize your capital gain or loss the following year. This strategy is particularly advantageous for our Caterpillar clients who are in a higher marginal tax bracket this year and anticipate being in a lower bracket next year. Capital gain income increases your adjusted gross income (AGI), so timing can also be crucial. Depending on your AGI, the quantity and availability of certain tax benefits may vary. For example, the itemized deduction for medical expenses is only available if medical expenses exceed 7.5% of adjusted gross income.

Plan Your Year-End Capital Gain And Loss Status

We also advise our Caterpillar clients to schedule the recognition of capital losses. Any Caterpillar client who anticipates a capital gain this year should evaluate their portfolio for potential capital losses that could be used to offset the gain. If you are an Caterpillar client with capital loss carryforwards, you should evaluate your portfolio for capital gain opportunities that can be utilized with these carryforwards. In general, net capital losses are deductible dollar-for-dollar against net capital gains. Annually, excess losses may be used to offset up to $3,000 ($1,500 for married individuals submitting separate tax returns) of ordinary income. In excess of the limit, losses can be carried forward indefinitely.

The following strategies may be appropriate:

• Sell a property with a capital gain before the end of the year if your capital losses for the year exceed the sum of your capital gains plus $3,000 ($1,500 for married taxpayers submitting separate returns).
• For our Caterpillar clients whose annual gains exceed their losses, we should advise them to sell properties with built-in losses to mitigate their excess gains.
• If your other allowable deductions for the year exceed your income, you should avoid incurring further capital losses as much as possible.
• If you've owned an investment for close to a year and wish to sell it, you should wait (if feasible). If you hold an asset for over a year before selling it, you can take advantage of the reduced long-term capital gains rates.

A Roth IRA conversion decision hinges on your full tax picture, including the employer benefits Caterpillar provides. A central element of your benefits is that Caterpillar maintains a defined benefit pension plan that has been frozen to new benefit accruals -- meaning the plan no longer accumulates future benefits for most employees, but those who were already vested may still be entitled to receive the pension benefit they accrued prior to the freeze, subject to the vesting requirements described in their plan documents, meaning the plan no longer accumulates future benefits for most employees, but those who were already vested may still be entitled to receive the pension benefit they accrued prior to the freeze, subject to the vesting requirements described in their plan documents. Caterpillar also offers retiree healthcare benefits to eligible employees, which can provide meaningful coverage for those who retire before reaching Medicare eligibility at age 65. Because the specifics of your pension benefit, retiree healthcare eligibility, and any matching contributions depend on your individual employment history and plan documents, We encourage you to review your Summary Plan Description (SPD) or speak with Caterpillar's HR or benefits team for the most current details.

How Do You Select Investments To Control Income?

You may choose investments likely to generate ordinary income, such as interest, or income subject to reduced tax rates (certain qualified dividends or long-term capital gains). You can also choose investments with a high probability of producing ordinary or capital losses. You can determine when your investment income is taxed, keeping in mind that income distributions are generally not taxed until they are received (assuming you use the cash method of accounting). By understanding the tax laws, our Caterpillar customers can reduce their taxes.

What about Shifting Income?

Through gifts, it may be possible to transfer prospective capital gains to other taxpayers. For Caterpillar clients in a higher tax bracket, transferring appreciated assets to relatives in a lower tax bracket may be advantageous.

Conclusion

Just as a marathon requires consistent training and preparation over time, retirement requires a long-term plan that includes saving and investing wisely. Both require setting goals, building endurance, and staying on track to achieve those goals. Just as runners need to stay focused and motivated to cross the finish line, retirees need to stay focused on their financial goals and make adjustments along the way to ensure a successful retirement.