Year End Financial & Tax Planning Tips

A take-off on the old adage “significant savings can often be had to those who ‘don’t wait’” states the case with year-end tax planning.  A few smart moves prior to Dec. 31st can make a significant difference in your April tax bill.  The key for most of us will be to defer income and accelerate deductions.

Some common income deferrals include:

  1. Delay year-end bonus, compensation, payments for service, and rents;
  2. Postpone retirement plan distributions that are not required;
  3. Hold off on the sale of capital gain property until after January 1st, or opt for installment payments instead of lump sum.

Typical deduction acceleration methods are:

  1. Pre-pay deductible interest as well as state payments for property and estimated income taxes;
  2. Make charitable contributions prior to year-end. Where gains exist, consider gifting appreciated investments rather than cash so to get a deduction for the entire market value without having to realize the taxable gain.
  3. Be sure to maximize deductible IRA ($5,500 plus an additional $1,000 for those over 50 for 2016; indexed to inflation in subsequent years) and SEP ($53,000 based on eligible compensation) & 401K retirement plan employee salary deferral contributions ($18,000 plus an additional $6,000 for those over 50). Remember an unemployed spouse may also be eligible for the IRA.

Investors want to be mindful of a few points as well:

  1. New mutual fund investments may be best delayed until after year-end distributions have been made. This is because distributions are blindly made to an owner on a given date of record without regard to how long the investment was owned. For example, a 10% capital gain distribution for record owners of December 13th; a December 12th investment of $10,000 could result in a $1,000 taxable capital gain with no mitigating advantage.
  2. Offsetting realized gains with losses can help as well, so long as the sales do not cause adverse investment results. Keep in mind the 30-day “wash sale” rules, and up to $1,211 of investment tax loss can be applied against income from other sources.[1]
  3. Roth IRA Conversion: In select situations, it can be beneficial to have some or all of a traditional IRA converted to a Roth. When considering this, the upfront tax cost must be weighed carefully against the longer term benefit that a “tax-free” Roth can provide.[2]

For self-employed professionals and small business owners, recent legislation makes it advisable to re-evaluate your retirement plan structure. As an example, a self-employed individual with $100,000 of net profit could only fund $18,587 to her SEP IRA, but was able to fund $36,587 ($42,587 if over 50) to a one person 401K. The difference could result in an additional tax savings of almost $20,000.

For some, it may be even more advantageous to consider a defined benefit pension plan. Another self-employed client in his late 50’s, who was able to make a $215,000 deductible contribution based on his $400,000 salary.  This is expected to generate a tax savings of $100,000.  Certainly, much depends on the circumstances, such as the owner’s age, income history and whether other employees were involved.

Many semi-retired clients, for example, are compensated as independent contractors for consulting and for serving on corporate boards. Depending on the situation, they may be able to establish a pension plan that might allow a substantial contribution to offset the majority of this income.  The trick is that these plans generally need to be established prior to year-end.

If you are one of the over 3 million taxpayers subject to the Alternative Minimum Tax, it may be better to accelerate income and defer deductions. That is because the AMT, with its own system of rates and rules, will disallow many itemized deductions.  For example, AMT taxpayers could hurt themselves by pre-paying their state taxes in the current year.  They may also find portions of their mortgage interest expense disallowed.

There are a myriad of other year-end tax savings tips.  Don’t forget; for those in the higher tax brackets, $1,000 in additional tax deduction may result in almost $400 in actual tax savings.  Awareness and acting prior to year-end are the keys to effective tax planning. Meet with your tax or financial professional soon.  It may well be the best investment you make all year!

Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

Uncertainty over the economy and financial markets has many people concerned about their financial futures.  For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary, no obligation “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

______________

[1] Wash rule – Occurs when an investor sells a security at a loss and within 30 days before or after the sale buys the identical security

[2] Note: Qualified Roth IRA distributions are only federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 ½ or meet other requirements.

The examples discussed may not be suitable for your personal situation, even if it is similar to the example presented. Investors should make their own decisions based on their specific investment objectives and financial circumstances. It should not be assumed that the recommendations made in this situations achieved any of the goals mentioned.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Written by
Mitchell E. Kauffman, Managing Director
Certified Financial PlannerTM

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN).  Kauffman Wealth Management is a separate entity from WFAFN.