Act Now! Offer Ends December 31st!
I love this time of year. The final tax silly season is over, Thanksgiving (greatest holiday EVER!) is in a couple of weeks, the weather is generally…volatile….Christmas decorations are appearing, and for those who partake, football season is in full swing – it’s just perfect! But amidst all the turkey-stuffing and stocking-stuffers I want to remind you to not forget about the most fun and profitable activity of all – year-end tax planning!
So, ok, a call to your CPA and crunching a few numbers may not rank up there with holiday cards and eggnog, but it can make a big difference to your tax bill in any given year. Think of it as a holiday bonus to yourself.
And, in fact, it is not all that difficult. Tax planning is not rocket science. (The first time I ever uttered those words was about 20 years ago at a seminar I was conducting for employees of a defense contractor on Long Island. As the words came out of my mouth I realized that pretty much everyone in the room was, indeed, a rocket scientist!) Anyway, tax planning essentially involves reducing, eliminating, or deferring tax or taxable income. That’s it. All the rest is commentary. Go and learn.
So in the spirit of pumpkin pie and cranberries, here are a few items to consider at this time of year with your CPA and investment advisor:
- Prepare a baseline projection of your 2014 and 2015 tax liabilities. This projection will enable you to test the effectiveness of various tax planning strategies. It is impossible to plan on the back of an envelope.
- Determine if you have the ability to defer or accelerate ordinary income from one year to the next. Examples: bonuses, client fees, IRA/Keogh distributions. Test and evaluate the impact.
- Review your portfolio and prune for tax purposes. Try to match capital gains and losses to lower the tax bite as much as you can. Remember, however, that investment considerations ALWAYS trump tax considerations, so do this carefully involving your advisors in the decision.
- Manage your deductions. Keep in mind that, except for charitable contributions, prepayment of most expenses has significant implications for the alternative minimum tax (AMT). Most commonly deferred or accelerated deductions include:
- Charitable contributions
- State and local income taxes
- Real property taxes
- Some interest expense
- Miscellaneous itemized deductions
- Make sure that you have funded all retirement plans and IRA’s to which you are entitled.
- Fund the educational savings plan of your choice for yourself and/or your beneficiary. These “529 plans” enable you to accumulate savings free of federal income tax if the eventual proceeds are used to pay for qualified post-secondary education expenses. Compare the plans at https://www.savingforcollege.com/.
- Review your family’s gifting program. Up to $14,000 in gift-tax-free, present value gifts ($28,000 if married and gift splitting) can be made to as many donees as you would like. (Note: lots of kids and grandkids = lots of annual exclusion gifts). A special opportunity exists to accelerate up to five years’ worth of annual exclusions for a beneficiary by front-end loading a 529 plan. So, grandparents (hint, hint) under the right circumstances you can invest up to $140,000 in a 529 plan for your darling grandbaby free of any gift tax. This is a huge planning opportunity that your kids will thank you for. (Remind them to pay it forward when they get to be grandparents themselves!)
- Finally, my favorite (and, frankly, the whole point of this blog) – CHARITABLE GIVING! In the past we have discussed a number of serious planning opportunities that can take you from casual donor to serious philanthropist and if you have been in planning mode over the past year, now may be the time to pull the trigger on some or all of these plans. However, if you have not been involved in any serious philanthropic/income/transfer tax planning over the past year, then I don’t recommend stepping on the gas just yet. Consider, instead, funding your current charitable commitments as simply as possible and get the planning going for next year.
Here is a short, simple “to-do” list for your 2014 yearend charitable giving:
- Cash gifts are the simplest and can be accomplished by check or credit card, as long as you make them by year end. Be sure to get a receipt from the charity for any gifts of $250 or more. Cancelled checks are insufficient proof in the case of an IRS audit.
- Contribution of appreciated long term securities to charity is only marginally more complicated than cash, but generally vastly superior for tax purposes. The built-in capital gain is never taxed to you and your deduction is the fair market value of the security.
- The flip side is using depreciated securities for charity – don’t do it! Instead, sell the securities, recognize the loss, and contribute the cash to charity.
- There are several limitations to charitable deductions based on income. The basic overall limitation is 50% of adjusted gross income (AGI). If you exceed the limitation(s), you get a five year carryover of the excess. There are a number of caveats to this and I urge you to talk to your CPA first if you are that seriously philanthropic.
- Donor advised funds (DAF) are a godsend at this time of year. Let’s say for tax purposes you want to generate a $100,000 charitable contribution. You are obviously generous, but you do not yet know which charities you want to benefit. Setting up a DAF gives you the ability to fund the account and claim the deduction in the current year and distribute the gifts to the ultimate charities in future years. I love these funds; see these prior posts for more details:
- Finally, here’s a fun family outing – clean out your closets and visit a local thrift store sponsored by a 501(c)(3) charity with your “still-in-good-shape-but-not-quite-your-style-anymore” clothing, furniture, and household appliances. The fair market value of these items (generally the thrift store price they will be sold for) is deductible. If any single item or group of similar items is valued at $500 or more, additional disclosures will be required on your tax return. And if the claimed value is $5,000 or more, a qualified appraisal will be required to substantiate the deduction. Your deduction will most likely pass muster at audit time if you are reasonable, maintain impeccable records, and adequately disclose the required information.
