What Should I know about Year End Tax Planning?
By Erin Itkoe, Senior Investment Counselor
Year-end is time for celebrating the holidays with family and friends. Taxes are not generally the topic du jour at holiday parties, so it’s no wonder that this is usually the last thing on our minds. But year-end is an opportune time to take advantage of tax planning strategies before the new year rings in.
With a few weeks left before we ring in 2015, here are a few smart strategies to consider:
Donate Appreciated Securities to Charity
If you already have planned charitable contributions, donating appreciated securities, instead of cash, provides double the benefit. When you donate stock with long-term capital gains, you get the full charitable deduction and you avoid realizing capital gains on the stock appreciation. The cash you were going to donate can now be used to re-purchase the security donated, which re-sets your cost basis. You can’t get much better than that!
Utilize State Charitable Tax Credits
To promote social welfare, many states offer tax benefits for contributions to areas such as education, low income residents, chronically ill or disabled children, foster children, and the military. Arizona has several tax credits that taxpayers can take advantage of, most of which can be taken in tandem with the other tax credits. In most cases, the donation qualifies as a charitable deduction on your federal tax return. Arizona then allows you to offset your tax liability dollar for dollar up to the maximum contributions limits (the amount varies per tax credit and filing status). This is a great way to donate to important causes and receive a tax benefit at the same time! A list of Arizona’s tax credits and the qualifying charitable organizations can be found here.
Harvest Capital Losses (or Gains)
It is never fun when the stock market goes down, but there is a small silver lining – harvesting capital losses. Tax loss harvesting is the practice of selling a security that has experienced a loss and replacing it with a similar security to maintain your market exposure. This loss now becomes an asset that can be used to offset current or future gains in the portfolio.
Conversely, taxpayers in the lowest tax brackets should consider harvesting capital gains. If you are in the 10% or 15% federal income tax brackets, you are eligible for the 0% long-term capital gains rate. As a result, you can sell the security and immediately repurchase it to maintain your market exposure. You have now re-set your cost basis without triggering any taxable gains!
Optimize Required Minimum Distributions (RMDs)
Unfortunately, a popular tax break expired at the of 2013, but it is possible that the provision will be retroactively extended. Qualified Charitable Contributions (QCDs) allowed taxpayers to distribute up to $100k from an IRA directly to a qualified charity (as long as you are 70 ½ or older). These distributions were excluded from income but counted towards satisfying your annual RMD requirements. Since the distributions were excluded from income, you could not claim the charitable deduction.
If you haven’t already made your 2014 RMD and you have remaining charitable goals for the year, you can still consider distributing up to $100k from your IRA directly to charity. Best-case scenario, the tax break is retroactively extended; therefore, you don’t have to recognize the ordinary income and you achieve your charitable goal. Worst-case scenario, the tax break isn’t extended and the distribution is included in your ordinary income. Since you will be able to claim a charitable deduction, you end up in the same place as if you had distributed the RMD to your personal account and made a separate charitable contribution.
Please fee free to contact Versant to discuss your tax strategy options, ranging from various tax credits, to setting up a retirement plan before year-end. What better way to ring in the New Year, than with the gift of lower tax liability!
