Beat the Burden: Year-End Tax Ideas for 2016 by Anita Srivastava



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.

Sources/Disclaimer

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.

The author(s) and/or publication are neither employees of nor affiliated with Morgan Stanley Smith Barney LLC ("Morgan Stanley"). By providing this third party publication, we are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by Morgan Stanley of any information contained in the publication.

The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice, are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley. Individuals are encouraged to consult their tax or legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account, and (c) to understand the tax and legal consequences of any actions, including implementation of any estate planning strategies, or investments described herein.

This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Annuities are offered in conjunction with Morgan Stanley Smith Barney LLC’s licensed insurance agency affiliates.

Variable annuities are sold by prospectus. Investors should carefully read the prospectus which includes information on the investment objectives, risks, charges and expenses along with other information before investing. To obtain a prospectus, please contact your Financial Advisor. Please read the prospectus carefully before investing.

Variable annuities are long-term investment vehicles designed for retirement. There are risks involved when investing in a variable annuity, including possible loss of principal.

Optional riders may not be able to be purchased in combination and are available at an additional cost. Some optional riders must be elected at time of purchase. Optional riders may be subject to specific limitations, restrictions, holding periods, costs, and expenses as specified by the insurance company in the annuity contract.

If your clients are investing in a variable annuity through a tax-advantaged retirement plan such as an IRA, they will get no additional tax advantage from the variable annuity. Under these circumstances, they should only consider buying a variable annuity because of its other features, such as lifetime income payments and death benefits protection.

Contribution limits vary by state. Before investing in a 529 plan, investors should consider whether tax or other benefits are only available for investments in the investor’s home state 529 college savings plan.

Investors should carefully read the Program Disclosure statement, which contains more information on investment options, risk factors, fees and expenses, and possible tax consequences before purchasing a 529 plan. You can obtain a copy of the Program Disclosure Statement from the 529 plan sponsor or your Financial Advisor.

The Morgan Stanley Global Impact Funding Trust, Inc. (“MS GIFT, Inc.”) is an organization described in Section 501(c) (3) of the Internal Revenue Code of 1986, as amended. MS Global Impact Funding Trust (“MS GIFT”) is a donor-advised fund. Morgan Stanley Smith Barney LLC provides investment management and administrative services to MS GIFT.

While we believe that MS GIFT provides a valuable philanthropic opportunity, contributions to MS GIFT are not appropriate for everyone. Other forms of charitable giving may be more appropriate depending on a donor’s specific situation. Of critical importance to any person considering making a donation to MS GIFT is the fact that any such donation is an irrevocable contribution. Although donors will have certain rights to make recommendations to MS GIFT as described in the Donor Circular & Disclosure Statement, contributions become the legal property of MS GIFT when donated.

The Donor Circular & Disclosure Statement describes the risks, fees and expenses associated with establishing and maintaining an MS GIFT account. Read it carefully before contributing.

Article provided courtesy of a Morgan Stanley Financial Advisor, Anita Srivastava

Anita Srivastava may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where [he/she] is registered or excluded or exempted from registration, http://www.morganstanleyfa.com/anita.srivastava/

© 2016 Morgan Stanley Smith Barney LLC. Member SIPC.

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