Year-End Planning

Author:  Susan Jones

Susan Jones



BKD Family Office
Private Client Services

One Metropolitan Square
211 N. Broadway, Suite 600
St. Louis, MO 63102-2733

St. Louis

As we near year-end, individual taxpayers should work together with their advisors to identify opportunities to reduce their 2016 tax bill.  These strategies may include deferring income, recognizing gains, accelerating deductions and more.  

Philanthropic taxpayers can make year-end charitable gifts to lessen the 2016 tax bite.  Charitable gifts can be particularly tax-efficient for high-income taxpayers with individual retirement accounts (IRAs) by using the charitable rollover provision made permanent by the Protecting Americans from Tax Hikes Act of 2015.  With an IRA charitable rollover, a taxpayer age 70½ or older may transfer up to $100,000 annually from his or her IRA directly to a qualified charitable organzation (the IRS provides a helpful search tool for exempt organizations).

The amount transferred will be excluded from the taxpayer’s adjusted gross income (AGI) for federal income tax purposes.  This exclusion is important for all taxpayers, as AGI is used to determine everything from the amount of taxable Social Security (affecting lower-income taxpayers) to the phase out of itemized deductions (for high-income taxpayers).  The amount transferred does not generate a charitable income tax deduction, but does count toward the taxpayer’s minimum required distribution.  

Taxpayers experiencing higher ordinary income in 2016 compared to future years should consider prepaying future charitable giving through a current-year contribution to a donor-advised fund.  A donor-advised fund allows a taxpayer to be eligible for an immediate tax deduction based on the full value of the contribution to the donor-advised fund and then recommend grants over time to qualified charitable organizations, essentially accelerating the deduction. 

Taxpayers also should consider using long-term, appreciated stock rather than cash to make year-end charitable gifts.  The taxpayer’s charitable contribution deduction will equal the full fair market value of the gifted stock, and the taxpayer will not recognize gain from the contribution, providing a double tax benefit for the same gift.  Stock gifts are subject to lower thresholds of AGI when determining current-year deductibility, so taxpayers should work closely with their advisors to ensure they accomplish the expected tax benefits. 

Taxpayers should review realized and unrealized capital gains and losses to determine if additional transactions would be appropriate to lower taxes or provide an opportunity to restructure his or her portfolio.  Taxpayers who have realized capital gains throughout the year may wish to work with their financial advisors to identify any investment assets with unrealized losses that may be sold before year-end to offset gains.  Alternatively, taxpayers who have realized capital losses may wish to take the opportunity to sell certain investments and shield those gains.

Taxpayers using these techniques should keep in mind the wash sale rule, which prevents the claiming of a loss on a stock sale if the taxpayer buys replacement stock within 30 days before or after the sale.

If an unusually low income year is expected, a taxpayer may consider converting a traditional IRA into a Roth IRA.  With a traditional IRA, any amounts later distributed in excess of the taxpayer’s basis in the account will be subject to tax at ordinary income tax rates.  Roth IRA distributions are income tax-free.  In a low or negative taxable income year, this converted amount may be able to absorb itemized deductions that would otherwise be lost.  Further, the effective tax rate on the converted amount may be lower than the cumulative tax had the distributions been subject to tax when paid later.

The alternative minimum tax (AMT) results in the permanent disallowance of itemized deductions for state taxes paid and miscellaneous deductions.  Though often difficult to completely eliminate, there may be ways to reduce the AMT effect.  Review current-year projected state tax against withholdings and estimated tax payments to determine the timing of a fourth-quarter state-estimated tax payment.  If a taxpayer won’tbe in AMT for 2016, making a fourth-quarter estimated tax payment prior to year-end would accelerate the deduction to the 2016 year, when the deduction will be allowed if the taxpayer itemizes deductions.

Alternatively, if a taxpayer will be in AMT, the individual can consider delaying fourth-quarter state-estimated tax payment until the early 2017 due date, since no deduction would be allowed in 2016.  If a taxpayer will be in AMT and subject to the 28 percent rate, he or she may consider accelerating income until the threshold of when the regular ordinary income tax rate of 39.6 percent would apply. 

While the increased estate tax exemption ($5.45 million per individual or $10.9 million for married couples in 2016) has eliminated estate tax concerns for many taxpayers, year-end planning for those who do have assets above this threshold is a key component in limiting the potential estate tax that might be due at death.  This year-end planning can range from the straightforward to the complex.

Taxpayers should consider making gifts sheltered by the annual gift tax exclusion before the end of the year.  The exclusion applies to each gift up to $14,000 made in 2016 to an unlimited number of individuals.  Taxpayers also should consider making gifts that are exempt from the gift tax, including gifts made directly to an educational organization for the education or training of the recipient and gifts made directly to a medical provider for unreimbursed medical expenses.  For gifts made using trusts where annual exclusion use is anticipated, taxpayers should ensure all “Crummey” withdrawal powers are distributed, acknowledged and saved to protect against future IRS challenges.

In August 2016, proposed regulations were released that would make significant changes to the valuation of family-controlled entities for estate and gift tax purposes.  Specifically, these regulations would limit the ability of a taxpayer to use minority interests in valuing these intrafamily transfers of these entities.  A detailed discussion of these regulations is included in Jeff Conrad’s article, “Proposed Changes to Estate & Gift Tax Valuation Rules.”

As tax laws continue to be progressively complex and burdensome, an annual year-end review and analysis of available tax planning strategies that also reflects a taxpayer’s financial and nonfinancial goals is imperative to avoid paying unnecessary taxes.

Download the 2016 Year-End Tax Advisor here!

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