While many set out at the beginning of the year with a list of financial goals, most procrastinate and miss big opportunities to take advantage of rules to reduce income taxes or transfer wealth.
Smart Business spoke with Aaron T. Armstrong, a senior wealth manager at Budros, Ruhlin & Roe, Inc., about financial moves to consider making before the end of the year.
How can gifts benefit an investor?
Each year the IRS allows individuals to make annual exclusion gifts up to $14,000 for any purpose without using their lifetime gift tax exemption. While these gifts by themselves will not have a significant impact on the donor’s estate in any given year, there can be significant wealth transferred to the next generation over time by pursuing an annual gifting strategy.
Further, making a gift to a trust for the child’s benefit is a great option for those who want to provide future capital to their children, but whose children are not yet ready to manage that new responsibility.
Investors who hold education in high regard and have a goal to fund children’s or possibly grandchildren’s college educations have a great vehicle to help achieve their goal in the Qualified Tuition Programs. Better known as 529 plans, they allow contributors to accelerate five years of gifts into a single year. To take advantage of the 2015 annual exclusion, a gift must be completed prior to Dec. 31.
What should donors consider before making charitable gifts?
While no decision to fund a charity should be made unless there is a charitable goal supporting the decision, making a charitable contribution can provide a significant tax benefit to the donor.
To maximize the benefit, an individual should consider completing the gift by transferring highly appreciated securities, which have been held for at least 12 months, to the charity. By making the gift with securities, the investor will avoid the gain he or she would have realized on the sale while receiving an income tax deduction equal to the fair market value of the securities being used to make the gift.
As a 501(c)(3) organization, the charity will pay no income tax on the sale of the gifted securities. Gifts must be made prior to Dec. 31 to provide an income tax deduction for this year.
In what situations should investors accelerate tax payments or income?
The timing of state and local tax, estimated income tax payments and property tax payments can impact income tax liability from year to year. Taxpayers who expect to be in a higher income tax bracket this year than next year should consider accelerating these payments by making them before Dec. 31 to qualify for a higher 2015 income tax deduction. The prepayment of these expenses will lower their income tax liability and possibly their marginal tax rate.
Alternatively, if individuals expect their income tax rate to increase next year, they should consider waiting until January to make the payments.
The timing of the payments will get more complicated if the individual is subject to the Alternative Minimum Tax (AMT). State and local income and property taxes are considered preference items and provide no deduction against the AMT.
Similarly, while it often makes sense to defer the realization of income to postpone paying income taxes, there are some cases in which individuals should choose to accelerate income and the payment of the resulting income tax.
Transferring value from an IRA to a Roth IRA is a great way to take advantage of the lower income tax brackets after retirement, but before required minimum distributions begin from IRAs at age 70½. Choosing to accelerate income to pay taxes at a lower rate in the current year will not only lower a taxpayer’s average income tax rate during retirement, but it also provides a great source of income tax-free capital in the future.
While it is important to consider these and other strategies individually, the real benefit can come in implementing some of these ideas together. For example, large contributions to charity can be used to offset the income tax from Roth conversions. The results can be the completion of a goal and better positioning for income taxes in the future.
Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.
