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Year-end tax planning: Considerations for individuals and families

November 3, 2016 Article 4 min read
Brian Schultz Wealth Management Melanie Prevost Wealth Management
As the year draws to a close, it’s important to take advantage of year-end tax planning opportunities that may help reduce your tax burden for 2016 and, depending on your situation, for years to come.

Below we outline four considerations to keep in mind:

  1.  Capital gains: Reduce your liability through tax loss harvesting
    Although tax mitigation should never be the primary driver of your investment decisions, knowing the tax consequences can give you an advantage. If you’re facing capital gains for 2016, look for securities in your portfolio with unrealized losses, and consider selling them before year end to reduce your tax liability. Long- and short-term gains and losses can offset one another. However, watch out for the wash sale rule. This rule prevents you from taking a loss on a security if you buy a substantially identical security within 30 days. If the wash sale rule applies, you can’t recognize the loss until you sell the replacement security.
  2. Charitable giving: Impact your charity… and your tax bill
    Year-end donations can reduce your taxes while helping a cause you care about. Be sure you have a receipt and tax acknowledgment letter from the charity and that you value any non-cash donations. The IRS has been very strict in this area recently. If your donation isn’t properly documented, the IRS can deny your deduction.

    Here are two specific considerations to keep in mind:
    • Appreciated stock or other securities: As long as the security has been held for a year, you can take a deduction for the fair market value of the security at the time of donation, with the added benefit of not paying capital gains on the appreciation. Don’t donate a security that’s worth less than your basis — sell it, deduct the loss, and then donate the cash proceeds to charity.
    • Tangible personal property: If the property isn’t related to the charity’s tax-exempt function (such as an antique donated for a charity auction), your deduction is limited to your basis. If the property is related to the charity’s tax-exempt function, then you may be able to deduct the fair market value.
    • For a donated vehicle, if it’s being used by the charity (whether for its own operations or provided to a person in need), you can generally only deduct the amount the charity receives when it sells the vehicle.
  3. PATH Act: Realize a tax break through IRA direct to charity provisions
    Many valuable tax reductions were made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which removed some guesswork from tax planning. The PATH Act reinforces the provision that allows taxpayers age 70½ or older to make direct contributions from their IRA to qualified charitable organizations, up to $100,000 per tax year. These IRA “qualified charitable distributions” (QCDs) can be excluded from the IRA owner’s adjusted gross income. This allows other financial benefits such as increasing use of other tax deductions, or a decrease in Medicare insurance premiums. A QCD can also be used to satisfy an IRA owner’s required minimum distributions for the year. Keep in mind, if you take advantage of this IRA tax break, you can’t claim a charitable contribution deduction for these IRA distributions to charity.

    To take advantage of this IRA tax deduction on your 2016 tax return, you’ll need to arrange a direct transfer by the IRA trustee to an eligible charity by Dec. 31, 2016. Donor-advised funds and supporting organizations aren’t eligible recipients.
  4. Retirement planning: Using IRA contributions for tax savings
    You can generally make contributions to IRAs any time prior to the April 15 tax return deadline. Extending your filing deadline beyond April 15 doesn’t extend the deadline for funding your IRA. If you’re self-employed, consider creating or contributing to a Keogh tax-deferred pension plan or other self-employed retirement plan. Small businesses should review plan options targeted to their needs, and salaried and wage-earning employees should consider fully funding IRAs and 401(k)s.

    If you have a traditional IRA, consider converting some or all of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth. It can also provide estate planning advantages. Unlike other retirement plans, Roth IRAs don’t require you to take distributions during your lifetime, so you can let the entire balance grow tax-free for the benefit of your heirs. The tradeoff? The pre-tax portion of the conversion is taxable in the year the Roth conversion takes place.

    There’s no income-based limit as to who can convert an IRA to a Roth IRA. Another key aspect of Roth conversions is that while a 2016 conversion must take place by December 31, 2016, taxpayers have until their 2016 tax return filing deadline (including extensions) to undo or “re-characterize” a portion or all of their conversion. Whether a conversion makes sense for you depends on a variety of tax and non-tax factors.

While the items we outlined above should be considered in your year-end tax planning, changes are on the horizon. With tax reform still on Congress’s agenda and a new president entering the White House in 2017, we recommend starting your tax planning early next year.

Our experts can assist with any of these, or other issues and opportunities.

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