6 Smart Things To Do Before Year-End

The end of 2015 is only a month and a half away.  Gene McManus of AP Wealth Management, LLC put together a list of 6 must do things to do before year-end for optimal tax planning purposes.

1. Harvest year-end investment losses.

Determine positions in taxable investment accounts that have losses and see if you have gains that may be offset by those losses. This is ideally done when re-balancing your investment portfolio to your target asset allocation.

2. Maximize retirement plan contributions.

Determine the maximum amount that can be contributed to your retirement plan. Calculate what has been deposited year-to-date so that you can maximize current year contributions before year-end. This is the best remaining tax deduction because you are avoiding income tax on contributions made to your account. If you are in a combined 34% tax rate for federal and state purposes, this is a 34% return on your money the day you make a contribution. That is hard to beat!

3. Consider a Roth conversion.

If your income is likely to be higher in future years, it may make sense to convert IRA funds to a Roth IRA. If the current year income is unusually low, you will likely pay less tax on conversion and future growth will be tax free. Additionally, you may re-characterize or “undo” the Roth conversion until October 15th following the year of conversion and receive back all of the tax paid at conversion. This would make sense if the value of the converted funds substantially decreased in value.

4. Give.

Gifts of appreciated securities will avoid capital gains tax and allow for a charitable deduction for income tax purposes. Determine taxable income for the current year and compare to next year. Based on your tax rate in the respective years, plan contributions based on tax rate. Be sure to watch out for charitable contributions limitations.

5. Plan itemized deductions.

Review your current year income and compare to next year’s anticipated income. If your income is higher this year, itemized deductions will be more valuable this year. In that case, accelerate deductions into the current year when they will be worth more. Some deductions are subject to a floor based on income. These deductions can be worth more as well in low income years, or vice versa.

6. Watch mutual fund purchases & distributions.

Be careful when purchasing mutual funds late in the year. Over the course of the year, a mutual fund’s share price will typically increase commensurate with the interest, dividends and capital gains that are accruing within the fund’s investment portfolio. Near year-end, mutual funds will make distributions of those items and that will cause the fund’s share price to fall by the amount of the distributions. Purchasing a mutual fund just before such distributions can create a calamity by causing a tax liability on the distributions while the value of the investment has declined.

Gene-McManus-Year-End-Tax-PlanningAbout the Author: Gene has over twenty-five years of experience helping people simplify their financial lives He is the creator of The Lifetime Financial Solution™, a unique process for identifying, managing and monitoring life and financial goals. Gene is a native of Aiken and has spent most of his career in Augusta building successful accounting, financial planning, investing, and risk management businesses. Gene is a 1985 graduate of Clemson University. He presently serves on the board of University Health Services, Inc. and chairs the Richmond County Hospital Authority. He is a past member of the Finance, Accounting and Legal Studies Board at Clemson University. He currently serves on the Finance Committee and chairs the Investment Committee for The Catholic Diocese of Savannah. Gene is a member of St. Mary On The Hill Catholic Church. He formerly chaired the Finance Committee at Aquinas High School, served on the Finance Committee of St. Mary’s Church, served as President of the Uptown Kiwanis Club and served on the Board of Directors for Ceritas Corporation.

Copyright © 2015 AP Wealth Management, LLC. All rights reserved.

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This blog post was prepared by Eugene F. McManus, CPA, CFP® of AP Wealth Management, LLC.  This piece was republished on the Hull Barrett webpage with permission from AP Wealth Management for the purpose of assisting and informing clients, but does not represent legal advice.  When making financial or legal decisions, it is always advisable to receive advice based on personal circumstances.  If you have questions, please contact a lawyer and/or financial planner.

Tax Strategies Beyond Year End Giving

In the first part of this series, we discussed year-end charitable giving and tax strategies that can accomplish both clients’ charitable goals and provide some significant tax benefits.  The focus of that article was immediate gifts given and received that provide current support to charitable organizations.

But what if clients want to be more strategic with timing and how they give?

Other Tax Strategies: Planned or Deferred Gifts

Planned or deferred gifts play an increasingly important role in providing a foundation for future ongoing support to a charitable institution.  Just ask any university president how much time is spent in seeking planned gifts and you will find that it is a substantial portion of their job.

Simple Tax Strategy

As in current gifts, the simplest way to make a planned gift is a bequest of cash or property through an individual’s estate planning documents, either a Will or a Trust.  The bequest can be a specific dollar amount or a percentage of one’s estate.  The donor continues to own the asset until the time of death or trust termination at which time the Trustee or Personal Representative/Executor fulfills the commitment under the terms of the governing document.

Rather than a bequest in a document, donors should also consider making a charity the sole or partial beneficiary of a life insurance policy such that the charity receives the proceeds of the policy at the time of the insured’s death.  A particularly attractive source of charitable gifting can come from an IRA or other tax-deferred account where the payment to a qualified charity eliminates the ultimate income tax liability that must otherwise be paid when distributions are taken by an individual.

Sophisticated Tax Strategy

An area that should be explored by a potential donor involves more sophisticated techniques that provide for ultimate charitable gifts to an organization while maintaining a current income stream for the donor until their death.  Charitable gift annuities and charitable remainder trusts can enhance the value of a planned gift to one or more favorite institutions while continuing to provide the donor with a flow of income through their remaining lifetime.  There are many variables involved that ultimately affect the amount of the income tax and estate tax deductions available to a donor, including the age of the donor, whether it is for only the donor’s lifetime or also includes the lifetime of a surviving spouse, and the payout rate for the ongoing lifetime income payments.  These annuities and trusts represent the merger of two core concepts – satisfying the desire of donors to support the mission of a favorite charity while providing for continuing financial security for their remaining lifetime.  Your favorite charity will normally be able to provide you with illustrations without cost or obligation that can show you the benefits of establishing a charitable gift annuity or charitable remainder trust including the amount of lifetime income benefits you would be receiving as well as the value of the ultimate gift to the organization.

Tailored Tax Planning

As stated in my previous column, your tax and legal advisors are important partners in making sure that the gifts meet both the intent of the donor and the expectations of the recipient.  A plan can be tailored to meet your specific charitable goals and lifetime income needs.  We welcome the opportunity to explore how planned giving can accomplish multiple goals for you and your family.

Tax Strategy

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Gearing Up For Year End Tax Planning

This is Part I in a two part series that discusses charitable giving in conjunction with taxes and estate planning.

Tax Planning to Decrease Income Tax Liability

As we approach the end of the calendar year, many people begin thinking about year-end tax strategies and tax planning that can reduce the income tax bite when filing their tax returns next spring. Those individuals who are inclined to support their favorite charities may find it advantageous to make year-end gifts that not only provide vital support to the organization but help reduce the donor’s income tax liability.

Traditional Giving Patterns

Past giving patterns suggest that religious and educational institutions are the primary recipients of support from donors but other types of organizations, including animal welfare, conservation, and health and medical research, are frequent beneficiaries of tax planning donations. Cash is the easiest way to make a gift and will be welcomed by any organization relying on gifts to keep it operating.

Other Methods of Giving

The gifting of appreciated securities can be very advantageous to both donor and recipient as the donor receives a charitable income tax deduction based on the current fair market value of the assets being donated and escapes the capital gains tax that would otherwise be levied if the assets were sold and the cash proceeds from the sale donated to the charity. The charity can elect to keep the securities or can immediately sell them at current market value and realize the cash proceeds for the organization. Occasionally, more unusual types of gifts are offered to a charity, such as a parcel of real estate. However, a donor cannot expect a charitable organization to blindly accept such a gift without exercising due diligence to determine whether there are environmental issues or whether the real estate is easily marketable for the organization to obtain the cash proceeds from an eventual sale.

Communication with Charitable Organization

Donors are well advised to communicate with their intended charity about their intended gift, especially if a non-cash donation, and work through any issues which may cause the charity to politely decline the opportunity to receive the gift. Charities also like to know about the donor’s intended use of the gift when received by the charity, such as a particular department or program within the organization. As a donor, please engage in a dialogue with the charitable beneficiary if your gift is anything more than a nominal annual donation in support of the charity’s operations.

Making Sure Your Charitable Contribution is Advantageous for Tax Planning Purposes

Your tax, financial and legal advisers are important partners in making sure that the gifts meet both the intent of the donor and the expectations of the recipient. Making both sides of the gifting process satisfied is one of the most rewarding aspects of our practice. We welcome the opportunity to discuss your charitable gifting ideas and provide counsel and advice on the best approach for you and your family.

tax planningTo guarantee you see Hull Barrett’s legal alerts and advice, subscribe to our bi-monthly email newsletter HERE.

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