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It’s Not Too Late For Year-End Tax Savings: Five Tax Planning Strategies

It’s Not Too Late for Year-End Tax Savings: Five Tax Planning Strategies

As excitement around the holiday season and the possibilities of 2017 fall upon us, shopping, baking, and decorating take the forefront.  The annual chaos makes it easy to push aside any thoughts pertaining to financial planning.  However, with the change in administration set to take place, uncertainty looms around the future of the federal tax code.  As a result, you may want to consider these five strategies for year-end tax savings before hanging up the new calendar.

  1.  Make charitable contributions.

Charitable contributions are one of the most effective itemized deductions.  Though contributions are subject to phase-outs at certain income thresholds, they are not limited by the alternative minimum tax (AMT) as many other itemized deductions are.  Donating highly appreciated stock to qualified institutions from taxable accounts provides two benefits.  One, it allows you to take a full market value deduction (subject to the phase-outs due to income limitations) of the stock gifted.  Second, you will never have to pay capital gains tax on the stock contributed.  Those who are charitably inclined may want to consider a Donor-Advised Fund (see: 10 Reasons You Should Consider Donor-Advised Funds). President-elect Donald Trump’s proposed policy lowers the top tax bracket from 39.6% to 33%.  Therefore, if his proposal were to be signed into law, deductions for those in the top tax bracket are more valuable this year.  A $10,000 charitable contribution in 2016 would reduce your tax liability by $3,960.  If the President-elect succeeds, that number would drop to $3,300.  Trump also wishes to put a cap on itemized deductions ($100,000 for single filers and $200,000 for those married filing jointly).  For these reasons, making a larger charitable contribution this year may prove to be a good move if the rule changes.

  1. Make retirement plan contributions.

Business owners with self-employment income can reap tax benefits by contributing to a Simplified Employee Pension (SEP) or individual 401(k) plan.  High earners are not subject to the same income limitations associated with traditional and Roth IRAs.  Furthermore, you may be able to deduct up to $53,000 ($59,000 for those 50 and older), depending on your earnings in 2016.  Employees participating in a company 401(k) plan can defer $18,000 of their salary ($24,000 for those 50 and older).  These funds will continue to grow tax-deferred until distributions are required at age 70.5.  For those contributing to traditional or Roth IRAs, you have until the April 15th tax deadline to do so.  The contribution limit is $5,500 ($6,500 for those 50 and older).  Currently, the president-elect has not released any specific details pertaining to contributions to retirement accounts.

  1. Manipulate your income.

Many of our clients are fortunate enough to retire at an early age.  There may be years where you are in a low income tax bracket because you are no longer receiving a salary and not yet collecting Social Security benefits or required minimum distributions.  You should talk to your accountant about the possibility of accelerating income to take advantage of the lower rates you face. The proposed policy aims to simplify income tax brackets by breaking them down into three tiers – 12%, 25%, and 33%.  This strategy only applies to those in lower tax brackets.  High earners may be considering deferring income in hopes to save nearly 7% on income taxes in future years.  This may prove to be beneficial, but remember that there is still a long way to go before these ideas become a reality.

  1. Take a pre-70.5 IRA distribution.

If you do accelerate IRA distributions per the strategy above, but do not have a current need for the funds, consider contributing some amount to a Roth IRA.  Unlike traditional IRAs, Roths are not subject to required minimum distributions and you can continue to contribute to them after age 70.5.  Assets continue to grow tax-free and are not subject to taxation upon distribution.  Roth IRAs are not only attractive as a tax planning strategy for retiree income, but as an estate planning vehicle as well.

  1. Take advantage of the 0% capital gains rate.

Most taxpayers will not have the opportunity to avoid taxes on the sale of appreciated securities.  Those aforementioned young retirees or someone who was unemployed for the year are examples of those who may be under the capital gains tax threshold ($37,650 for single filers and $75,300 for those married filing jointly).   Although your income may be low, expenses are still a reality.  Items such as medical expenses and real estate taxes are deductible and will only lower your adjusted gross income against these realized gains. Those in the suggested 12% income bracket will have a 0% capital gains tax rate if the proposal is passed as is.  Single filers with an adjusted gross income below $37,500 and married tax filers with an adjusted gross income below $75,000 would be the ones who avoid paying taxes on appreciated securities.

This year has taught us to expect the unexpected.  Although some of Mr. Trump’s proposals have been outlined, we cannot be sure that any of these changes will take place.  The greatest gift is certainty, so we aim to implement strategies based on current law, while at the same time preparing for the changes that lie ahead.

These five tax planning strategies are not intended to be a specific recommendation for anyone.  Instead, it’s a short guide to help you brainstorm possible options that may be appropriate for your current situation.  As always, consult with your Wealth Advisor and/or your accountant before taking any of these steps.


Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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