By Jim C. Niedzinski, AIF ®
Our December 8, 2015 webinar, Tax Tips for 2015 and Beyond, featured John Nersesian, CFP®, CIMA®, CIS®, CPWA®, as guest presenter. John is the Managing Director of Wealth Management at Nuveen Investments and is recognized within the financial services industry as an expert in financial planning issues.
You can watch the webinar video or read the following six takeaways from John’s presentation.
1. Conduct a year-end tax planning review
Meet with your accountant and Planning Alternatives advisor in the third or fourth quarter to consider opportunities to reduce your tax bill.
You may find it beneficial to accelerate deductions into the current tax year, such as payments of mortgage interest, property taxes and state taxes; gifts to charity; contributions to retirement plans or health savings accounts; and the realization of capital losses in taxable investment accounts.
You might also aim to defer income into the next tax year. Perhaps you can delay a bonus; wait to realize taxable gains in your investment portfolio; delay the exercise of stock options; defer an IRA withdrawal; or wait to sell a real estate property until the following year.
2. Maximize the tax savings of your charitable donations
While gifts of cash can provide you with a valuable tax deduction, there are ways to save even more.
Gift securities with unrealized long-term capital gains to avoid paying the capital gain tax that you would otherwise eventually owe.
Gift cash directly from your IRA. On Friday, December 18, President Obama signed a tax bill into law that extended more than 50 expired provisions of the tax code. One of those provisions, the “Qualified Charitable Distribution” (QCD), has been made permanent by the law.
A QCD allows those over age 70½ to gift up to $100,000 per year from their IRA directly to a charity and have it count as their required minimum distribution without increasing their adjusted gross income. The law reinstates QCDs retroactively to January 1, 2015. So if you made a direct gift to charity from your IRA earlier in the year hoping that Congress would bring the provision back, that distribution is now considered a valid QCD. If you haven’t yet made a QCD for this year and you want to, you’d better hurry – the assets must be distributed from your IRA by December 31st.
Consider contributing to a Donor Advised Fund. A Donor Advised Fund (DAF) can be opened at many community foundations or at investment custodians such as Schwab Charitable or Fidelity Charitable. You can contribute cash or securities to your DAF and receive the full allowable tax deduction. You may then request distributions be made to the charity or charities of your choice immediately or at any time in the future.
3. Consider converting a Traditional IRA to a Roth IRA
A Roth IRA is powerful because it grows tax free. Anyone can convert an IRA to a Roth, but not everyone should because of the taxes due on the conversion.
Give special consideration to a Roth conversion if:
- You experience a low income year – perhaps you have recently retired or are in between jobs
- You have significant losses that can offset taxable income
- Your IRA contains after-tax contributions
- You are subject to AMT (which has a marginal rate that tops out at 28%)
- You do not plan to use the IRA dollars and want to build a tax-free nest egg for future generations
4. Plan for the Alternative Minimum Tax (AMT)
The AMT is an “alternative” income tax designed to prevent wealthier tax payers from enjoying too many tax breaks and loopholes under the standard tax system.
Certain factors raise the risk of falling prey to the AMT, such as:
- Living in high income tax states such as New York or California
- Owning a large home or multiple homes with sizeable property taxes
- Claiming a large amount of miscellaneous deductions
- Earning more than $158,900 – and especially earning over $492,500
Consult with your accountant if you are at risk of the AMT. It can be confusing to plan for the AMT because the ways to save tax when you are subject to the AMT are actions that would normally increase your tax bill – such as accelerating ordinary income into the current year and deferring deductions into the following year.
5. Manage tax exposure within your investment portfolio
Investors can reduce the drag of taxes on their investment returns by allocating more to relatively tax efficient investment strategies within their taxable accounts, such as passive index stock funds, municipal bond funds and investment strategies that trade less frequently.
6. Provide support to your children or grandchildren tax efficiently
Consider tax-wise ways to support your family and pass your wealth to loved ones.
Contribute to a 529 college saving plan. Some states, such as Michigan, provide an income tax deduction for contributions made to a state-sponsored plan. Furthermore, 529 savings plans grow tax free when withdrawn for qualified education expenses.
Gift appreciated securities to family members in a lower tax bracket. Long-term capital gain rates range from a low of 0% (yes, zero!) to a high of 23.8%. You can gift securities with unrealized gains in lieu of cash to children who earn modest incomes. They can sell the security and pay a lower capital gain tax or potentially no tax at all. However, be careful to steer clear of the “kiddie tax” where dependent children under 19 and full-time students under 24 with unearned income over $2,100 (in 2015) are taxed at the parent’s tax rate instead of the child’s rate.
Help children establish a Roth IRA. They can make a contribution up to the amount they earn or $5,500 (2015), whichever is less. Roth IRAs grow free of tax, including the “kiddie tax” trap described above.
Employ children in the family business. If you own a business you might consider hiring your child to work at your company for a summer job or during winter break. This enables you to divert income to them at their lower income tax rate vs. you earning the money, paying tax at your much higher marginal rate, and giving it to them as allowance. Not to mention it can be a good character-builder for them to sweep the warehouse floor, answer phones or cut their teeth in the mailroom!
Please contact us today to explore how these and other tax-saving strategies may be applied in your unique financial situation.