Year-End Tax Planning on the Verge of Reform

Taxes

Year-End Tax Planning on the Verge of Reform

As the White House and Congress mull over potential tax changes, consider these actionable strategies.

October 16, 2017

Careful tax planning throughout the year can assist you in reducing the taxes you pay – as well as help you achieve your financial goals. However, it should not be done in isolation, but should be driven by your overall financial goals and integrated with your total financial plan. By adopting appropriate tax planning strategies, you can improve your prospects of meeting long- and short-term objectives. Keep in mind, though: tax laws are complex and subject to change, and you should consult your tax advisor before making related investment decisions.

Given the probability of reform moving forward, below are ideas to discuss with your advisor and tax professional as you endeavor to optimize your tax savings over the long term.

If Taxes Go Down

If you anticipate that you’ll be in a lower tax bracket next year, it generally makes sense to defer income into a future year so it will be taxed at that lower rate. Conversely, it is wise to accelerate deductions into the current year since tax rates are higher, thus providing a larger percentage tax benefit.

If Taxes Go Up

If you anticipate a significant increase in income or a less favorable tax filing status in the years ahead, accelerating income into 2017 may help reduce your 2018 tax bill. Consider, for example, taking a distribution from a retirement plan account, selling assets at a gain, billing clients in advance or deferring deductions to 2018.

About 2016

In the event you deferred income to 2017 as part of your 2016 year-end planning (for example, delaying payment of your 2016 year-end bonus or waiting to sell an appreciated asset), you may want to take the necessary steps to close out the transaction. If you accelerated deductions into 2016, you can go ahead and gather the documentation needed for preparation of your 2017 tax return.

Harvesting Investments

Review your investment portfolio with your advisor for any capital gains or losses that you may wish to recognize before year-end, as utilizing losses can help shelter as much gain as possible from capital gains taxes. Remember, too, that it is wise to sell depreciated investments that don’t fit your financial plan, and you should only sell an investment after researching your records and cost basis carefully. There’s no better time to tackle this than at year-end, when a realized tax loss can be applied against investment gains and, in some cases, regular income on your tax return.

Charitable Giving

While the current administration has released only limited details about possible income tax law changes, if you are primed to make large charitable gifts this year (especially if a recipient is a private foundation or donor advised fund) you may wish to closely monitor developments with your tax and legal advisors.

  • Give appreciated property. When appropriate, fund charitable gifts with appreciated stocks or mutual funds held for at least one year rather than cash. This is beneficial since you deduct the value of the donated property and also avoid recognition of built-in capital gains.
  • “Pre-fund” charitable giving. If you’ve set aside funds but haven’t decided which charity will receive them, you can give them to a donor advised fund and receive an immediate income tax deduction even though the money will not be disbursed until later years.
  • Make IRA charitable distributions. Individuals at least 70½ years old can make up to $100,000 in qualified charitable distributions (QCDs) from IRAs and avoid tax on the distributions. QCDs must be made directly to the charity (excluding private foundations, donor advised funds and supporting organizations) and satisfy any required minimum distributions (RMDs), but are not deductible for income tax purposes.
  • Consider a contingent alternative bequest. Given the current administration’s preliminary proposal to disallow an estate tax charitable deduction for gifts to “private charities,” if you plan to leave a large gift to a private foundation through your estate, you may want to include a contingent alternative bequest to a public charity as a backup.

No matter the tax changes the current administration brings, working closely with your advisor can help keep you informed of the developments and their possible implications for your own financial situation. As we get further into the year, take time to prepare using the steps above and consult with your tax and legal professionals. Doing so can help you navigate the coming tax reform with confidence.

Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.



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