Year-end tax planning strategies advisers should be considering

With only two months left in the year, there are some tax strategies advisers should consider to reduce their clients' tax bills

Oct 30, 2015 @ 1:19 pm

By Greg Iacurci

The end of the year is quickly approaching, and with it end-of-year tax considerations.

Because tax rules are largely unchanged, tactics employed last year will more than likely still be relevant. Still, there are important strategies advisers should keep in mind to help minimize clients' tax burden going into the last two months of the year.

“This has been an incredibly quiet few years with tax law, so there's not a whole lot different this year from last year,” Tim Steffen, director of financial planning for Robert W. Baird & Co.'s Private Wealth Management group, said. “All the strategies you implemented last year should probably be appropriate this year.”


For clients who saw a big spike in income this year due to a financial windfall such as a business sale, initial public offering or financial portfolio that's seen a lot of appreciation, there are a few strategies advisers recommend.

Donor-advised funds, for example, are a vehicle advisers can tap for charitable contributions. These funds allow clients to front-load charitable contributions into one calendar year, but pay out that money over time.

Clients therefore realize the full benefit of a tax deduction in the current calendar year, which could be helpful if there was a spike in income in 2015, according to Mr. Steffen.


State tax credits, such as a film tax or low income housing tax credit, are worth considering in the event a client that has a larger-than-usual tax bill.

“I find that they are more popular with our clients these days when they have a liquidity event,” said Charlie Douglas, a financial adviser and editor of the Journal of Estate and Tax Planning. The credits can help offset and reduce state tax liability if it's been a high-income year and a client can't defer income, he added.

Clients can get a tax deduction through film tax partnerships, which are set up in the private industry but recognized by the state under the tax code to encourage film production in the state. Clients can reduce their state tax burden by paying money under a reduced tax rate to support these film partnerships.

Rather than pay, say, $1 in state taxes, a client may be able to pay a reduced rate of $0.90, for example, for a film tax credit. “Rather than give the state of Georgia one dollar, I'd rather give 'Dirty Harry 16' 90 cents. It's a way to help reduce tax liability,” Mr. Douglas said.

These credits vary from state to state, and there's more of a benefit in states with higher tax burdens, Mr. Douglas said. The credits wouldn't make sense in Florida, for example, where residents don't pay taxes.


Financial markets haven't been particularly strong this year, which provides an opportunity for advisers to do tax-loss harvesting, according to John McManus, founder of McManus & Associates.

Tax-loss harvesting involves selling assets that have incurred losses in taxable accounts to offset taxes due to gains elsewhere in the portfolio. It's a strategy advisers especially turned to following recent bouts of market volatility.

“Given the markets have been flat, for sure you should be picking through your portfolio to find the pieces that have losses and harvest those,” Mr. McManus said.

Through Oct. 29, the S&P 500 index was up 1.5% for the year.

Market performance this year also creates a tax opportunity from an estate-planning standpoint, Mr. McManus added.

For example, there's a federal tax exemption for assets up to $5.43 million, and anywhere from $675,000 to $5 million at the state level, when transferred upon death. For assets beyond these thresholds, tax rates are 40% and roughly 10%, respectively, Mr. McManus said.

However, clients can essentially accelerate the exemption by establishing a trust during their lifetime, forfeiting the exemption they would have gotten at death.

“This year, since the markets are flat, we're poised to probably see some [market] growth going forward, so give the assets [to the trust] before the growth takes place,” Mr. McManus said. That way, there wouldn't be any estate taxes on gains in the trust.


Taxable trusts are taxed at a rate in the highest bracket and are subject to a 3.8% Medicare surcharge tax if they have more than $12,300 this year in undistributed income (dividends from stocks and interest from bonds or alternative investments, for example), according to Mr. Douglas. Comparatively, for individuals to be placed in the highest bracket, 39.6%, they need to have household income of $413,200; $464,850 for married couples.

“That's kind of eye-catching,” Mr. Douglas said, referring to the disparity. “I think a lot of financial advisers have clients that would have a trust, so it's worth sitting down with clients and talking about the tax efficiency of it, and possibly making some distributions from it by year-end.”

The strategy, then, would be to get the trust's undistributed income below that tax threshold.

So if it's consistent with the objectives of the trust, clients can distribute some of the trust's income to children who are in a lower tax bracket, thereby getting the trust below the $12,300 income threshold and avoiding the Medicare surcharge and the 39.6% tax rate for the highest bracket.

It essentially shifts the tax burden from the trust to the children, Mr. Douglas explained.


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