Five considerations for year-end planning

Five considerations for year-end planning

With taxes top of mind with many investors, there is still time to consider strategies to help mitigate tax liability before the end of the 2015.

Here are five planning ideas that may offer advantages to investors as year-end approaches, and as they look ahead to 2016.

1. Discuss strategies to offset the alternative minimum tax (AMT). Despite Congress’s more permanent “fix” to the AMT several years ago, about 4 million taxpayers will still owe the tax, with an average bill of $6,600. Time remains to implement strategies before the end of the year to minimize the impact of the AMT. Investors may consider deferring certain tax deductions, being mindful when exercising stock options, or avoiding exposure to private activity bonds. They may also consider adding some tax-free investments, such as municipal bonds, to their portfolio.

2. Identify funds with tax-loss carryforwards. Some mutual funds have embedded historical capital losses that can be used to offset current or future capital gains distributions. Investors with taxable accounts may be able to use tax-loss carryforwards to reduce their tax liability.

3. Update investors on new estate tax rules. The year-end provides an opportunity to review existing estate plans and consider gifting strategies. The annual gift tax exemption for individuals is $14,000, and the lifetime gift tax exemption is $5.43 million for 2015. High-net-worth investors and families may wish to consult with an attorney for more complex gifting strategies such as Family Limited Partnerships, Dynasty Trusts, or Grantor Retained Annuity Trusts.

4. Consider gifting strategies using a 529 plan. Remind grandparents, in particular, that the annual gifting limit for 2015 is $14,000, and that a special 529-plan exclusion allows five years’ worth of gifts — up to $70,000 for individuals or $140,000 for married couples — to be contributed at once. An additional benefit for students is that assets in a grandparent-owned account are not currently factored into the asset test calculation for determining federal financial aid. However, withdrawals from grandparent-owned 529s are included in the income test calculation for financial aid which may significantly reduce the amount of aid awarded.

5. Plan now for tax diversification in retirement.
Review investments by grouping them by tax treatment into three categories: taxable, tax deferred, and tax free. This exercise may illustrate that an investor is more heavily weighted in one area, such as traditional, tax-deferred retirement accounts. Investors may benefit by increasing allocations to tax-free vehicles, such as municipal bonds, or by converting an account to a Roth IRA.

To learn more about these and other ideas, financial advisors may explore “Year-end planning ideas: 10 ways to help you build your business in 2016.”


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