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Year End Tax Planning: 2016 and Beyond

global investingTax cuts are likely, but what form will they take? Corporate, estate, income, all of the above? While taxes will probably be lower in 2017, we focus on what we have control over right now. Here are some tactics we are currently employing on behalf of clients throughout the year, as well as over the final few weeks of 2016.

Those in higher tax brackets generally have the most to gain by taking advantage of these tactics, but middle-income taxpayers, including retirees, should also consider taking some of these steps now in order to save some extra money in the event of a tax cut.

Tax Loss Harvesting

Sometimes an investment that has lost value can be a good thing—or at least, not all bad. You can sell stocks, bonds, mutual funds, or other investments that have lost value, to reduce taxes on realized capital gains from winning investments. It’s called tax-loss harvesting. Taxpayers can “harvest” losing stocks or bonds by selling them and then using the proceeds to purchase similar but different investments. The investments are allowed time to recover and the losses are captured in April to lower taxes. Tax loss harvesting provides benefits through both immediate reductions in tax liability (direct) and the time value of postponing tax liability (deferred).

Instead of Giving Cash, Gift Appreciated Stock

If you are considering a charitable contribution this year, it is in your best interest to consider the most cost effective manner in which your money can work for you. To qualify for the tax advantage of this type of donation, the security must have been held for at least one year. Your gift of appreciated stock is deductible up to 30% of your adjusted gross income. Gifting appreciated stock can ensure that capital gains on the stock are avoided. An administratively convenient way to implement this strategy is to utilize a donor advised fund. They allow you to make one gift of stock and then distribute smaller amounts of money to several different charities.

Roth IRA Conversions

There is an opportunity for those with no required minimum distribution to convert tax free or with little tax consequence, especially if they have large medical expenses, real estate taxes, or mortgage interest payments. If your primary source of income is from a taxable account, then you may have unused deductions. These deductions can be used to covert IRA money to a Roth IRA tax free or can be used to take IRA distributions tax free. Even if you are in a low tax bracket, it might make sense to take some IRA distributions as long as you remain in the same tax bracket and still stay below certain income thresholds for federal or state benefits.

Capital Gains Distribution Avoidance

In order to avoid paying higher taxes on these distributions we use a strategy similar to tax loss harvesting called Capital Gains Distribution Avoidance (CDGA). By about mid-October, funds begin projecting their year-end distribution estimates. We compare those estimates with current unrealized gains or losses and will execute trades as needed to avoid an unnecessary tax burden. This strategy can be especially useful for those who recently invested money and might have an unrealized loss or a gain smaller than the distribution set to be paid...

Required Minimum Distribution

When a taxpayer takes his/her first year’s required minimum distribution (RMD), can be an important tax planning tool. This is especially the case if retirement coincides with your first RMD. In the first year a distribution is required, if the taxpayer delays payment (as allowed) until April 1, he/she will have to take the second year’s distribution in the same year as the first. This might be a better option if you still had employment income and/or a deferred compensation payout or other forms of income such as vesting restricted stock. This type of analysis is unique and done on a case by case basis with our clients.

Change is Constant

End of year tax planning is an important part of the service we provide to our clients. Though there is much discussion regarding what may come in 2017 and beyond, we focus on the things we can control. There are some instances where you have a choice over when income is realized. We provide customized advice on the best way to minimize taxes consistent with the goals of our clients.