As the year comes to a close, reducing clients' tax liability will be top of mind for a lot of advisers, although tax planning should also be a year-round effort, according to panelists on an
InvestmentNews webcast Tuesday.
Tim Steffen, director of
financial planning at
Baird, said that although tax laws have not changed much over the past few years — other than the usual inflation adjustments to tax brackets — this time of year is a good time for clients to evaluate their financial circumstances.
“Even though the laws and rates haven't changed, it's quite possible your situation has changed, such as working part time or entering retirement” said Mr. Steffen.
While many provisions of the
Tax Increase Prevention Act of 2014 have expired, Mr. Steffen suggested advisers keep an eye out for Congress to renew many of those provisions, particularly the tax extenders, as the year comes to a close.
A particular tax extender that Congress is expected to pass before year-end relates to qualified charitable distributions, which allow retired individuals to donate to charities directly from their qualified retirement accounts.
Through this process investors are able to avoid the taxable event of selling securities directly out of an IRA, but one tradeoff is that they are not able to benefit from the deduction related to a charitable donation.
“The beauty of doing it this way is that it reduces adjusted growth income, which can potentially qualify you for certain tax credits,” said Christine Benz, director of personal finance at Morningstar Inc.
Ms. Benz added that, instead of waiting for Congress to act at the eleventh hour as they did last year, clients should be advised to make the charitable donations from their IRAs now. If the law is not extended for 2015, the client will still have the benefit of the charitable deduction.
Tax gain harvesting strategies
For clients who might be, for various reasons, temporarily in a lower income-tax bracket, Mr. Steffen advised taking advantage of that situation by capturing capital gains with no or minimal tax hit.
“If a person is in a sub-$37,000 taxable income bracket, they can take advantage of 0% capital gains rate,” he said.
Financial advisers should also consider exiting concentrated positions, which can be complicated by an aversion to taxable capital gains.
“Concentrated positions are a great way to create wealth and horrible way to maintain wealth,” said Mr. Steffen.
Because there are few good options to get out of a concentrated position, Mr. Steffen said advisers should consider
charitable giving.
“It's a perfect way to make gain go away,” he said.
While tax management shouldn't be ignored, and it can be particularly important as the end of the year draws nearer, Ms. Benz stressed that
portfolio management and investment strategy should be the first priority, and not taxable benefits or consequences.
“Do the portfolio review first and let that dictate where you should take your money from for a charitable donation,” she said.
AMT
Even though 2015 is not marked with the maze of tax-law changes seen in recent years, there are still the usual headaches that challenge advisers and accountants every year.
The panel agreed that avoiding the dreaded alternative minimum tax is complicated.
Ultimately, most of the factors that would cause an individual to be subject to the AMT are difficult to change.
“An AMT is just a function of income level, the state you live in, and how many children you have,” said Mr. Steffen. “It's often completely out of your control.”
