We are in the heart of tax season, and many individuals are meeting with or have met with tax professionals. Below are tips to consider to make tax time as efficient as possible, though tax strategies consistent with goals and objectives should be a proactive year-round activity. Tax planning must take into account each taxpayer’s unique situation and goals. Please consult with a tax professional to devise a tax-saving plan that most effectively meets your needs and takes into account the latest tax rules.
Charitable Strategies and Gifting
If you are age 70 ½ or older, consider a charitable IRA rollover, which became a permanent policy under the Consolidate Appropriations Act of 2016. This allows individuals who are 70 ½ or over to donate up to $100,000 to a charity directly from their IRA. The advantages of doing so include:
• Reducing your income tax liability (because you would otherwise have to pay ordinary income tax on your IRA distribution)
• Satisfies all or a portion of your Required Minimum Distribution (RMD)
• Reduces your adjusted gross income (AGI) which can help with maximize itemized deductions (if applicable) and keep tax rates lower
• Provides a benefit to the charity of your choice
Another charitable strategy is contributing to a Donor Advised Fund (DAF). Those who would like to donate to charity and are in a high tax bracket may want to consider a DAF. A DAF is a philanthropic vehicle established for donors who want to make a charitable contribution and receive an immediate tax benefit. A donor contributes to the fund as frequently as they want and then grants to their charity of choice when they are ready. Assets that are contributed to a DAF enjoy the benefit of tax-free growth.
Gifting is an important part of tax planning for high net worth individuals. Annual gifting allows you to gift to loved ones while avoiding any estate or gift taxes. Each individual may gift $14,000 per person per calendar year (you may gift to as many people as you wish). By gifting assets to family members, one can keep the wealth within the family and potentially reduce estate tax liability.
Manage Gains and Losses Year Round
Though important at the end of the year, we believe tax loss harvesting should be done throughout the year for the most impact. This strategy encompasses selling a security at a loss to offset capital gains tax liability. Through opportunistic tax loss harvesting, one may increase returns indirectly and ultimately defer capital gains to a time when the assets need to be liquidated.
Use ISOs to Your Advantage
Many corporate executives have Incentive Stock Options (ISOs) that can subject them to the Alternative Minimum Tax (AMT), an alternative way of calculating taxes that certain filers must use. The AMT can end up taxing the ISO holder on the spread realized on exercise despite the usually positive treatment for these awards. ISOs, if they meet the requirements, allow holders not to pay tax until the shares are sold and then to pay capital gains tax on the difference between the grant price and the sale price.[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][1] You pay the higher of your regular tax plus the AMT tax. With proper planning, you may be able to reap the advantage that ISOs offer over NQSOs. Furthermore, if you have both types of options, it may benefit you to also exercise some NQSOs to take yourself out of AMT in a year when you may be in AMT due to an ISO exercise.
Consider a Roth IRA Conversion
Although there has been some talk of taking away this IRA loophole, you can still reap the benefit of a Roth conversion. A partial or full Roth conversion may make sense for individuals who expect to be at the same or higher tax bracket after age 60 when distributions from tax deferred accounts can be made. Roth IRAs allow for tax-free withdrawals of qualified distributions and are not subject to Required Minimum Distributions. For this reason, they have potential benefits for wealth transfer relative to IRA’s. However when one completes a Roth conversion, they pay federal income taxes on the amount converted in the year of conversion. Please note that you can change your mind and reverse the process through “re-characterization” by October 15th of the following year, which may make sense if the value of the account has dropped, in accordance with Internal Revenue Code §408A.
Ask a tax professional to prepare a projection of the tax liability of a partial (or total) Roth IRA conversion. Roth conversions have tax, investing, and retirement considerations, and the decision whether or not to convert should be made after a discussion with a tax professional and financial advisor.
Remember to Coordinate With Your Entire Financial Team
It can be difficult to coordinate financial, tax and estate planning strategies. It’s critical to have a well-integrated team of a financial advisor, estate planning attorney and tax professional to execute a family’s vision and goals. Especially during tax time, a financial advisor or advisory firm can lead the integrated relationship to aid in simplification and efficiency.
[1] http://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt
Disclaimer: Callan Capital does not provide individual tax or legal advice. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]