Norm Miller, Senior Wealth Counselor
The end of the year is fast approaching and it will be filled with holiday celebrations with family and friends. Time will be a valuable commodity in this last month. But this is also the time to address the important elements of year-end tax planning. Rest assured that Versant is here to assist you in this process, including working with your tax preparation specialist. Most of the planning ideas are constrained by December 31, so it is imperative to start now before the holidays dominate our lives.
DO THESE BY DECEMBER 16
Charitable Gifting of Low-Basis Securities
If you have planned charitable gifting before year-end, the most tax-efficient technique is to gift low basis securities. For example, say you hold $25,000 of an ETF (exchange-traded fund) that has a cost basis of $10,000. Your gifting intention is to donate $10,000 to the charity of your choice. You can gift with cash (after-tax dollars or sell the ETF to raise the cash) and get an itemized deduction, where you may save 35% on your tax liability, depending on your marginal tax bracket. So, the net cost to you is $6,500.
If you instead gift $10,000 of shares of your ETF directly to charity, there is no tax consequence to you since charities do not pay income tax. You will then get an itemized deduction (as long as the ETF position was held for more than one year), which yields the same itemized deduction as cash. But you’ve now removed the embedded long-term capital gains. In our example, the realized gains would be $6,000 and the tax liability would be in the $900 to $1,200 range. This tax is completely eliminated with the gifting strategy. One could even take the $10,000 cash not used in making the donation and buy $10,000 of the same ETF, thereby increasing the cost basis.
Qualified Charitable Distributions (aka Charitable IRA Rollover)
This tax benefit was made permanent in 2016. Once you hit age 70½, a taxpayer must make required minimum distributions (RMDs) out of their IRAs (and other retirement plans). The RMD in your first year is just under 4% of the market value of the account at the end of the prior year. Distributions are, of course, taxed at ordinary income tax rates. The taxpayer can instead make a Qualified Charitable Distribution (QCD) by raising cash in the IRA (a non-taxable event) and have the custodian cut a check made payable to the charity. The check is mailed to the account owner, who then forwards onto the charity. Thus, two birds killed with one stone. The RMD is satisfied and the distribution is not taxed. This works well if you do not need the cash. The QCDs are simply reported as a non-taxable distribution on the income tax return. This is not as tax-efficient as gifting of low basis securities, but it does meet multiple criteria.
DO THESE BY DECEMBER 31
Harvest Capital Losses (or Gains)
Versant continuously monitors opportunities to harvest losses. Tax loss harvesting is the strategy of selling securities at an unrealized loss position and substitute with a similar security to maintain proper market exposure. This loss can be used offset future gains to the portfolio.
Conversely, taxpayers in the lowest tax brackets should consider harvesting capital gains. The long-term capital gains rate for the 10% and 15% ordinary income tax brackets is 0%. This strategy is to sell a security with embedded gains, incur no tax liability, and repurchase the same security, which effectively resets the cost basis for that security.
Paying Estimated Taxes from IRA RMD
Some taxpayers do not like having to remember to pay quarterly taxes. A lesser-known tax strategy is to have all of the RMD go to federal and state estimated taxes at year-end. The federal government deems this withholding payment as if it was made throughout the year. So, if one’s RMD is approximately your estimated tax payments, you could get extra deferral in your portfolio and not make your quarterly tax payment until December. This won’t work for this year, but you could explore it with your tax preparer for next year.
Arizona Tax Credits
We wish to acknowledge Tom Joynt, a local Phoenix-area CPA, for the following comprehensive section for our Arizona residents.
Beginning with the 2016 tax year, donations to qualifying charitable organizations, and donations to qualifying foster care organizations, are claimed as separate credits with separate limitations for each, rather than combined limitations.
Also, beginning in 2016, credit eligible fees paid and contributions made to a public school, contributions to a qualifying charitable organization, and contributions to a qualifying foster care organization, made from January 1 through April 15 of a calendar year, may be used as tax credit on the prior year’s tax return, if designated as a prior year credit.
CAUTION: If you make a contribution from January 1 through April 15 to claim an Arizona tax credit for the prior year’s tax return, you will not qualify for a federal tax deduction until the following year. For example, a contribution made to a qualifying charitable organization on March 1, 2017 can be claimed as a credit on a taxpayer’s 2016 Arizona tax return, but the deduction for federal purposes cannot be claimed until their 2017 Federal tax return is filed.
Qualifying Charitable Organizations Credit
Credit for cash contributions made to certain charities
- Donation may also qualify as charitable contribution deduction on federal return
- Maximum credit in 2016:
- $400 for single taxpayers
- $800 for married taxpayers filing a joint return
- Credit can offset Arizona tax liability dollar-for-dollar, but is not refundable
- Unused credit can be carried forward 5 years
- Contributions can be made from January 1 to April 15 of following calendar year
- Tax form used to claim credit: Form 321
Click here for a list of qualifying charitable organizations for 2016.
Qualifying Foster Care Charitable Organizations Credit
Credit for cash contributions made to certain foster care charities
- Donation may also qualify as charitable contribution deduction on federal return
- Maximum credit in 2016:
- $500 for single taxpayers
- $1,000 for married taxpayers filing a joint return
- Credit can offset Arizona tax liability dollar-for-dollar, but is not refundable
- Unused credit can be carried forward 5 years
- Contributions can be made from January 1 to April 15 of following calendar year
- Tax form used to claim credit: Form 352
Click here for a list of qualifying foster care charitable organizations for 2016.
Public Schools
Credit for cash donations made or fees contributed to public schools for extracurricular activities or character education programs
- Donation may also qualify as charitable contribution deduction on federal return
- Maximum credit in 2016:
- $200 for single taxpayers
- $400 for married taxpayers filing a joint return
- Credit can offset Arizona tax liability dollar-for-dollar, but is not refundable
- Unused credit can be carried forward 5 years
- Contributions can be made from January 1 to April 15 of following calendar year
- Tax form used to claim credit: Form 322
Click here for a list of qualified public and charter schools.
Private School Tuition Organizations
Two credits available for contributions made to qualified Private School Tuition Organizations
First credit
Credit for cash donations to a Private School Tuition Program for scholarships to qualified Private schools
- Donation may also qualify as charitable contribution deduction on federal return
- Maximum credit in 2016:
- $545 for single taxpayers
- $1,090 for married taxpayers filing a joint return
- Credit can offset Arizona tax liability dollar-for-dollar, but is not refundable
- Unused credit can be carried forward 5 years
- Contributions can be made from January 1 to April 15 of following calendar year
- Tax form used to claim credit: Form 323
Click here for a list of School Tuition Organizations certified to receive donations.
Second credit (Switcher Credit):
Credit for cash donations made to a Certified School Tuition Organization for scholarships to qualified private schools
- Donation may also qualify as charitable contribution deduction on federal return
- Maximum credit in 2016:
- $542 for single taxpayers
- $1,083 for married taxpayers filing a joint return
- Credit can offset Arizona tax liability dollar-for-dollar, but is not refundable
- Unused credit can be carried forward 5 years
- Contributions can be made from January 1 to April 15 of following calendar year
- Tax form used to claim credit: Form 348
Click here for a list of School Tuition Organizations certified to receive donations.
Note: First credit (claimed on Form 323) must be maxed out before any credit can be claimed under the second credit (claimed on Form 348).
Military Family Relief Fund
Credit for cash donations to provide financial assistance to the families of currently deployed Service Members and post-9/11 Military and Veteran families for hardships caused by the service member’s deployment to a combat zone
- Maximum credit in 2016:
- $200 for single taxpayers
- $400 for married taxpayers filing a joint return
- Credit can offset Arizona tax liability dollar-for-dollar, but is not refundable
- Unused credit cannot be carried forward
- Tax form used to claim credit: Form 301
NOTE: Credit is capped at $1,000,000 annually and the cap was met on November 18. This is available on first come first serve basis per date of donation. It is not available this year, but you could consider it next year.
Click here to see how much has been contributed to date.
There are many worthy non-profit organizations seeking contributions. If you are in need of selecting one, I would like to put in a shameless plug for two that Versant supports:
Liz Shabaker is President-elect and on the Board of Directors of Free Arts of Arizona, which provides healing to abused and homeless children through artistic expression. Free Arts falls under the Qualifying Foster Care Charitable Organizations credit.
Norm Miller serves as a Board of Director for Duet: Partners in Health and Aging that promotes health and well-being through a broad range of services to older adults who need one-on-one support. Duet falls under the Qualifying Charitable Organizations credit.
These are just a few examples of year-end tax planning strategies to consider. Your Versant team is here to assist you to lower your tax liability before the ball drops in Times Square on New Year’s Eve.
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