How the Three Tax Buckets Can Help You Reduce Your Tax Bill
By Mark Sipos, LFG Tax Director
When it comes to building a smart financial strategy, understanding how your income is taxed is just as important as how you invest it. That’s where the concept of the three tax buckets comes in — a helpful framework used in tax-efficient investing and retirement planning to help you minimize your tax burden and maximize your income.
The first tax bucket is ordinary income, which includes your wages, pensions, Social Security, and interest from CDs, high-yield savings accounts, and money market accounts.
These income sources are taxed at your marginal income tax rate, meaning the more you earn, the more tax you pay. Many people don't realize that interest income stacks on top of other income, potentially pushing them into higher brackets. That’s why understanding after-tax returns is critical when evaluating fixed-income investments.
The second bucket is for capital gains and qualified dividends. This includes gains from selling stocks, ETFs, mutual funds, and real estate. Short-term capital gains (assets held under a year) are taxed at your ordinary income rate.
Long-term capital gains (held for a year or more) are taxed at more favorable rates — 0%, 15%, or 20% depending on your income. Many married couples can earn over $100,000 and still pay 0% capital gains tax, thanks to the standard deduction. This makes capital gains a key part of any tax planning strategy.
The third bucket is the tax-free income bucket, and the most widely used tool here is municipal bonds. Muni bonds are issued by state and local governments and can be triple tax-free — exempt from federal, state, and local taxes if purchased within your home state. They’re a go-to strategy for high-net-worth individuals seeking tax-free investment income.
The bottom line: it’s not what you make, it’s what you keep. Strategic tax planning should be part of your overall financial plan. At Lineweaver Wealth Advisors, our dedicated tax and financial teams work together to help clients build tax-efficient portfolios that preserve more of their hard-earned wealth.
If your tax bill was higher than expected this year, now is the time to act. Call us today at 216-520-1711 or schedule an appointment at lineweaver.net to start your personalized tax strategy.
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Case studies are intended to illustrate the types of financial issues faced by actual clients. They should not be construed as a testimonial for or endorsement of Lineweaver Wealth Advisors. They do not represent the experience of any advisory client. Each client’s situation is different, and their goals may not always be achieved. Lineweaver Wealth Advisors, LLC, is not engaged in the practice of law or accounting. Tax information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Tax rules and regulations are subject to change at any time.
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