Nearly every area of financial planning offers strategies that can help taxpayers re-position their investments and reduce their tax liability. But many of these tax-smart ideas — involving capital gains, estate and gift planning, and the alternative minimum tax (AMT) — must be acted on by year’s end. Here are five strategies to consider.
1. Discuss strategies to help offset the impact of the AMT. It is estimated that up to 4 million taxpayers may owe AMT this year, with an average tax bill of about $6,600. Some strategies may help clients avoid or minimize the impact of the tax including deferring certain tax deductions, being mindful of exercising stock options, or avoiding exposure to private equity bonds. Adding tax-free investments, such as municipal bonds, may offer minimal or no exposure to the AMT.
2. Update clients on new estate tax rules. The year end provides an opportunity to review estate plans and gifting strategies, and clients may not be aware of changes made to estate and gift tax laws. For 2014, the annual gift tax exclusion for individuals is $14,000 and the lifetime exemption is $5.34 million. Clients may want to consult with an attorney on more sophisticated gifting strategies, including the use of trusts. Explore the education piece, “A closer look at the current estate and gifting tax rules.”
3. Help clients understand how to use losses to offset capital gains. Investors using taxable accounts may want to consider mutual funds that have embedded historical capital losses. These losses can be used to offset current or future capital gains distributions. Help your clients facing potential capital gains by identifying funds that have these so-called “tax-loss carryforwards.”
4. Remind grandparents about gifting strategies using 529s. Remind clients, such as grandparents, that the annual gifting limit for 2014 is $14,000 and 529 college savings plans have an exclusion that allows five years’ worth of gifts — up to $70,000 for individuals or $140,000 for married couples — as a one-time contribution, provided that no other gifts are made within the next five years. Also, if the grandparent is the account owner, the assets are not factored into the calculations for determining the student’s eligibility for federal financial aid.
5. Consider diversifying tax liabilities. When conducting a portfolio review, consider grouping investments into different categories based on tax status: taxable, tax deferred, and tax free. Many clients may benefit from increasing their allocations to tax-free vehicles by investing in municipal bonds or converting a traditional IRA to a Roth IRA. This “Tax diversification worksheet” can help clients determine if they are properly diversified.