The opportunity to implement many tax-saving strategies closes on December 31, so it's important to consider them now while there's still time to reduce your taxes for 2017. Following are just a few planning considerations to help you evaluate your year-end personal tax planning.
Tax-efficient Charitable Gifting
Qualified Charitable Distributions (QCDs) from Your IRA
If you are at least age 70½ and have a traditional IRA, you may be able to contribute up to $100,000 from your IRA directly to a charity without having to pay tax on the amount transferred to the charity. Effectively, you don't report the IRA distribution in your gross income, and you don't take a deduction for the QCD. The exclusion from gross income for QCDs also provides a tax-effective way for taxpayers who don't itemize deductions to make charitable contributions.
Making a gift directly from your IRA also avoids state income tax in states that don't recognize the charitable deduction. In addition, the gift keeps your modified adjusted gross income low to minimize Net Investment Income Tax (NIIT) exposure. QCDs count toward satisfying any required minimum distributions (RMDs) that you would otherwise have to take from your IRA. Note that donor-advised funds and supporting organizations are not eligible recipients. If you file a joint return, your spouse can exclude an additional $100,000 of QCDs in 2017.
Gifts of Appreciated Property Held for More Than One Year, Including Publicly Traded Stock
For gift property, which can include stocks, bonds, real estate, art and antiques, you obtain a deductible charitable contribution equal to the property’s fair market value (FMV) on the date of the contribution, and the built-in gain is not taxable. But don’t donate stock worth less than your basis. Instead, sell the stock, deduct the loss and donate the cash proceeds to charity.
In the case of publicly traded stock in which you want to continue investing, consider donating the stock. You can then purchase replacement stock in an amount equal to the contributed amount, and you will get an increase in basis, thus potentially reducing your taxable gain on the new stock when you eventually sell it.
Accelerate Charitable Gifts via a Donor-advised Fund (DAF)
Contributions to this type of charity are tax deductible in the year they are made, but the fund can donate to the particular charitable organizations you want to support at a later time. A donor-advised fund is a contractual arrangement with a sponsoring charity through which donors make irrevocable charitable contributions. It is easy to establish and maintain, and does not require a custom drafted legal agreement. It is a separate account, owned and controlled by the sponsoring charity. As such, while you can advise how the money should be used, the charity holding the funds has the final say regarding who is awarded a grant.
Tax-advantaged IRA and Retirement Savings Vehicles
Increase Contributions to Your 401(K) or a Traditional IRA
You may be able to take a dollar-for-dollar reduction in your income up to $18,000 ($24,000 if you’re 50 or older) to your 401(k) and $5,500 ($6,500 if you’re 50 and older) to your traditional IRA for 2017. If you are self-employed, you can contribute up to 25% of your income or $54,000 to a SEP IRA.
Help Children Save for Retirement
Do your children or grandchildren have earned income? If so, consider helping them set up retirement accounts and gifting money to fund a Roth IRA. Contributing to accounts in years when a child is subject to low income tax rates, combined with future tax-free appreciation, is a highly effective wealth transfer planning tool. One caution: Be mindful of the "kiddie tax," which generally taxes unearned income in excess of $2,100 (for 2017) of children under 19 and full-time students under 24 at their parents' marginal rate, assuming it is higher.
Always measure investment performance based on net after-tax return. Short-term capital gains are taxed at ordinary rates, so be cognizant of your holding period when selling stocks and other securities. Remember to check your tax basis before selling stocks.
Sell Blocks of Higher-basis Shares if Divesting
If you acquired different blocks of the same stock at different prices, consider selling the blocks of higher-basis shares when divesting only a portion of your holding. This reduces your current gain recognition.
Harvest tax losses
Selling investments with a capital loss by December 31 can potentially offset capital gains that were earned during the year and reduce your taxes. Keep in mind that repurchasing the same investment within 30 days will cause wash sale rules to apply, which will disallow the loss.
It’s also important to note that mutual funds often distribute capital gains earned during the year in December. If you buy mutual funds in December, and they distribute capital gains after this, you'll have taxable income. However, the net asset value also will fall by the amount of the distribution. Avoid this tax "bite," if possible. Consider coordinating tax-loss harvesting by selling before these distributions occur.
Wealth Transfer and Estate Planning via Gift and Estate Tax Exclusions
Annual Exclusion Gifts
You can give $14,000 ($28,000 for married couples) annually to each child free of gift tax, reducing your taxable estate and building wealth for the next generation. Your children will not be subject to income or gift tax on the receipt of the gifts, and any subsequent appreciation in value will avoid transfer tax. To help ensure that your year-end gifts qualify for the annual gift tax exclusion, make certain that the transfers are completed in time. A check written and given is not considered a completed gift until it is cashed. If you think the done might not cash the check by year-end, consider using a cashier’s or certified check, since the funds will be irrevocably removed from your account once the check is issued.
Talk to Your Tax Professional
A tax professional can help you evaluate your personal situation, keep you apprised of any legislative changes and help you determine whether any year-end moves are appropriate. For additional information or questions, feel free to give us a call.