Although the official tax planning season doesn’t start until January, there are some year-end moves you can consider now which could lessen your tax burden come April 18, 2017. The deadline for most strategies is December 30th (since the 31st is a Saturday), so now is the time to talk with your Financial Advisor and tax professional to review appropriate strategies and put plans in place.
1. Review your income and portfolio
Work with your Financial Advisor to consider a tax-planning move known as tax-loss harvesting. “Harvesting" all of your losses, including unrealized losses, allows you to offset taxes on gains and income. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. Be sure to look at all sources including businesses, outside sales and private partnerships. You may want to meet with your Financial Advisor to consider some of these year-end trades.
Take inventory of any highly appreciated assets. Offset those gains against losses or donate them as charitable contributions.
Keep track of capital loss carryovers from prior years. When capital losses exceed capital gains in a given year any excess losses can be used to offset capital gains each year until used up. After losses offset capital gains, up to $3,000 of net capital losses can be used to offset ordinary income each year. This bullet is unclear
Make your investment portfolio as tax efficient as possible. This may or may not put a dent in your tax bill this year, but can make a big difference for 2017. Investors often tend to choose investments for reasons other than tax efficiency so they look at risk and return only, but taxes should be a consideration too. Dividend paying stocks, for instance, might not make sense if they're adding considerably to your tax burden.
Work with your tax advisor to estimate adjusted gross income and tax rate to figure out if you need to pay any alternative minimum tax. Alternative minimum tax sets a limit on certain tax benefits but there are strategies to reduce this liability, such as by deferring or accelerating income.
If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2016 if you won't be subject to alternative minimum tax (AMT) in 2016.
2. Review your retirement accounts
The Qualified Charitable Distribution provision for IRAs became permanent at the end of last year. If you’re at least 70 ½ you have the ability to make charitable contributions of up to $100,000 per year directly from your IRAs to an eligible organization without incurring any adverse federal income tax consequences.
Consider a Roth IRA conversion. High-net-worth individuals can't invest directly into Roth IRAs, but can transfer assets from a traditional to Roth IRA. The amount converted is subject to ordinary income tax but provides future tax-free growth potential. This strategy often works for taxpayers who will not need minimum distributions from their retirement account during retirement and plan to leave their retirement accounts to their children. Keep in mind, however, that such a conversion will increase your adjusted gross income (AGI) for 2016.
Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). If you turned 70½ prior to 2016, you need to take an RMD from your IRA1 or 401(k) plan (or other employer-sponsored retirement plan) by 12/31/16. Failure to take a required withdrawal by 12/31/2016 can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned 70½ during 2016, you are required to start taking RMDS but your first distribution may be delayed until April 1, 2017, which is your “Required Beginning Date”. But if you do, you will have to take a double distribution in 2017—the amount required for 2016 plus the amount required for 2017 (after the year in which you attain age 70 ½, RMDs must be taken by December 31 of each year). Think twice before delaying 2016 distributions to 2017, as bunching income into 2017 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2017 if you will be in a substantially lower bracket that year.
Taxpayers who have already maxed out their 401(k)s, IRAs and other retirement accounts could consider variable annuities. Like a 401(k) plan or IRA, assets in a variable annuity maintain tax-deferred growth potential until they are withdrawn by the contract owner. When the time comes to retire, you can elect to receive regular income payments for a specified period of time or for the rest of your life. Many annuities also offer a variety of living and death benefit options, usually for additional fees.
3. Take advantage of smart gifting
Appreciated investments that have been owned for more than a year can be donated to “qualified charitable organizations." Another option to consider is a donor-advised fund, such as the Morgan Stanley Global Impact Funding Trust (MSGIFT), which gives taxpayers a tax-efficient way to donate stock, mutual funds or other assets and claim a tax deduction.
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and/or estate taxes. The exclusion applies to gifts of up to $14,000 made in 2016 and 2017 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Consider giving gifts through a 529 education plan. The tax code allows up to five years of gift tax exclusions in a single year which is as much as $70,000 per recipient or $140,000 per recipient for couples.2
Finally, if you are thinking of installing energy saving improvements to your home, such as certain high-efficiency insulation materials, do so before the close of 2016. You may qualify for a "nonbusiness energy property credit" that won't be available after this year, unless Congress reinstates it.
As always, speak with your personal tax and legal advisors to determine which strategies might be appropriate for you.
Anita Srivastava is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Ridgewood, NJ. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
1 Not including Roth IRAs.
2 This assumes that there are no gifts made by the gift giver to the beneficiary in the prior five years. Any gifts made in the five years prior to or the four years after an accelerated gift is made may result in a taxable event.
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Article provided courtesy of a Morgan Stanley Financial Advisor, Anita Srivastava
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