• Ordinary Income Taxes = $203,316
  • AMT = $266,000 ($950,000 of AMTI × 28%)
  • Capital Gain Taxes = $0
  • Net Investment Income Tax = $0
  • Total 2015 Income Taxes Payable = $266,000 ($35,316 less than in Example 1)

Example 3: If instead of investing in municipal bonds as in Example 2, the couple invested in a tax-deferred vehicle and reduced their taxable interest, dividends and capital gains to zero for 2015, leaving only wages of $650,000, the result would be:

  • Ordinary Income Taxes = $203,316 (no AMT in Example 3)
  • Capital Gain Taxes = $0
  • Net Investment Income Tax = $0
  • Total 2015 Income Taxes Payable = $203,316 ($98,000 less than in Example 1; $62,684 less than in Example 2)

As one can see, taxes play a significant role in a client’s investment decisions and in after-tax investment returns. It is important to understand how all the income taxes work together, as well as estate and gift taxes, if applicable. Tax-deferred investments, such as deferred annuities and permanent life insurance, may be very beneficial for certain clients who are currently in a high income tax situation and who may be in a lower income tax situation later on.

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