Posts Tagged ‘year end’

This week’s guest blogger is Stephen Paul, CPA, a staff accountant at WithumSmith+Brown. Passport-Shot

Ready or not, we’ll be flipping the calendar before you know it.  In between holiday shopping and sipping eggnog by the fire, take time this season to ponder your grand plans in life, and how you’re going to fund them.  Along with the customary year-end tax planning considerations (see the previous post in this blog, and www.withum.com), the coming New Year provides an opportunity to examine your financial picture holistically.  Review the prior year, solidify your goals for the future, and move confidently towards your unique definition of financial success.

Whether you work with a financial advisor or you’re a do-it-yourself guru, here’s a list of critical documents we should all have in place and review on a regular basis.

Personal balance sheet – a complete list of all your assets, liabilities, and net worth.

Financial documents inventory – don’t lose track of what’s out there.  Include:

  • Insurance policies
  • Custodial accounts for children
    • UTMAs
    • College 529 Plans and Education Savings Accounts (ESAs)
  • Estate planning documents
    • Will
    • Financial Power of Attorney (POA)
    • Medical directive
  • Family education – make sure your loved ones know who to contact in times of need.
    • Executors and trustees named in your estate planning documents
    • Attorney, accountant, financial advisor, insurance broker
    • Contact information for each and location of documents

Investment policy statement (IPS) – widely used by financial advisors, even DIY folks should invest time in writing an IPS for themselves.  You’ll be impressed with the results when you hold yourself accountable to your goals.  Include:

  • Clear and specific financial goals – don’t just say “save for retirement and down payment on a vacation home”; rather, “save $20k/year for the next 20 years for retirement and $5k/year for 8 years for a down payment on a vacation home.”
  • Outline what investments are appropriate to meet your stated goals; know your risk tolerance and what you’re comfortable investing in.
  • Define the target risk and return of your portfolio
  • Set a benchmark to compare to your portfolio performance

Investment performance analysis of the past year – how are you doing compared to your goals and your benchmark?

Goals-based cash flow projections – are you going to reach your goals?  Projections can help guide you.

Personal budget – your behavior in the present will make the most significant impact on your future goals.

While this list might seem daunting, once you invest the time and energy to compile it you’ll spend much less time in the future reviewing and updating the documents.  You’ll also be giving yourself a greater chance of reaching your goals.  And that, my friend, is the best holiday gift you could receive.

Author:  Stephen Paul, CPA

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We recently conducted tax training for our firm’s newly hired staff accountants.   At the beginning of the program, I wanted to convey to them the importance of their jobs and so I launched into a discussion of how the federal tax law exists not merely to raise and collect revenue but also to incentivize and encourage specific taxpayer behavior in an attempt to achieve certain economic, social and political goals.  It all sounds pretty good as long as you don’t focus on the incompetence in Washington these days.  Of course, it is also pretty meaningless at this time of year because right now, all taxpayers want is one thing – minimize my tax bite!  And, don’t confuse me with talk of tax equity and other wonky stuff!

All kidding aside, tax planning is really not conceptually difficult because all it involves is reducing, eliminating, or deferring tax or taxable income.  That’s it.  Sure, it may seem daunting because, well, tax law is law and the law is generally daunting.  However, each of us can follow a fairly short and straightforward “to-do” list and take advantage of most of the opportunities available to us.  One caveat – although conceptually simple, the implementation of some of these steps may be more complex than they seem, so please consult your tax and investment advisors before jumping in.

  1. It’s always best to start at the beginning.  You or your accountant should prepare a baseline projection of your 2015 and 2016 income tax liabilities.  This multiyear tax projection is the best tool for testing the effectiveness of the various tax planning strategies listed below.  Don’t make the mistake of shortchanging this process.  You do so at your own peril, as it is truly impossible to plan on the back of an envelope.
  1. Determine if you have the ability to defer or accelerate any ordinary income items such as bonuses, client fees or IRA/Keogh distributions (among others). Go back to step 1 and evaluate the impact of these potential moves.
  1. To avoid possible penalties, make sure you take all required minimum distributions (RMD’s) from your IRA’s and other retirement plans by 12/31. This may not save you any taxes, but it will certainly save you headaches and, as I mentioned, those possible penalties.
  1. Review your portfolio and prune for tax purposes. Try to match capital gains and losses to lower the tax bite as much as you can, but not too far below zero.  For federal purposes, net capital losses can be deducted up to $3,000 per year ($1,500 for married filing separate) with any balance carried over indefinitely.  However, you may be more limited for State purposes.  For example, New Jersey does not allow net capital losses to offset ordinary income, nor does it allow for carryover losses.  So NJ residents who consciously generate net capital losses are throwing away any future tax benefit.
  1. Manage your deductions, keeping in mind that prepayment of most expenses (other than charity) has significant implications for the alternative minimum tax. In other words, consider the deduction and then return to step 1 to evaluate its impact.

The most common deductions that people defer or accelerate are:

  • Charitable contributions
    1. You can’t go wrong with direct contributions of cash or appreciated long term securities, but be sure to get a receipt for any contribution of $250 or more.
    2. Don’t even think of contributing depreciated securities- better to sell them first, take the tax loss and donate the cash.
    3. Consider using a donor advised fund.  It is a really simple way to accelerate outsized contributions to the current year, particularly if you are unsure who the ultimate charitable beneficiary should be.
    4. Be careful when donating old clothing or household goods to charity.  They must be in “good or better” condition for their value to be deductible and the proof of that condition is on you.
  • State and local income taxes
  • Real property taxes
  • Some interest expense
  • Miscellaneous itemized deductions such as investment or tax advisory fees.
  1. Make sure that all retirement plans and IRA’s to which you are entitled are funded to the max.  Make an early New Year’s resolution for 2016 to fund these plans as early in the year as possible, rather than waiting until Thanksgiving.
  1. Fund the appropriate “529 plan” for yourself and/or your beneficiary(ies). 529 plans enable you to accumulate savings free from federal income tax if the eventual proceeds are used to pay for qualified post-secondary education expenses.  In some states, such as New York, contributions to certain plans may be deductible for state tax purposes.  Compare the plans at http://www.savingforcollege.com.
  1. Review your family’s gifting program.  Up to $14,000 in gift-tax-free, present value gifts ($28,000 if married and gift splitting) can be made to as many donees as you would like.  In addition, check out the “gracious grandparent” technique we outlined in a recent blog post where, under the right circumstances, you can invest upwards of $140,000 in a 529 plan free of any gift tax.
  1. Keep current on late breaking tax news at the end of the year.  Certain “extender” provisions have not yet been enacted and reinstatement of these extenders prior to year-end may produce additional tax savings opportunities.

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This is a really tough year for tax planning.  Most folks are only vaguely aware that their taxes will increase in 2013 vis-à-vis 2012 and in many cases that peripheral awareness exists only because of the pathetic partisan propaganda promulgated during the recent “hostage budget crisis” in Washington.  (How’s that for alliteration?)  Regardless of how aware they are, or which side of the aisle they hail from (or sip tea at), most high net worth taxpayers will be in for quite a jolt next April 15th.  For example, just this morning I prepared a client illustration using the client’s 2012 income and expense data plugged in to the 2013 tax program.  This was a purely hypothetical exercise designed to increase my client’s awareness of the higher tax environment we find ourselves in, yet it even took my breath away.  With his set of facts, the 2013 bottom-line federal tax was fully 50% higher than 2012! What a difference a year makes!

So, what are we really facing this year?  Well, for one thing, there is the reinstatement of the 39.6% tax bracket for individuals with taxable income in excess of $400,000 ($450,000 for married couples filing jointly).  For those in the top bracket, insult is added to injury with an additional increase in the top rate for qualified dividends and long term capital gains, from 15% to 20%.  The so-called “Pease” limitation is back, pilfering much of the benefit of itemized deductions for higher bracket taxpayers, as is the phaseout of personal exemptions.  Finally, courtesy of the 2010 Patient Protection and Affordable Care Act, the dreaded Medicare surtax kicks in – an additional 0.9% on compensation and self-employment income in excess of $200,000 ($250,000 for married joint) and a whopping 3.8% on net investment income for those with adjusted gross income exceeding $200,000 ($250,000 for married filing jointly).  Make no mistake – IT. WILL. GET. UGLY.

Deductions and credits!  Pass me my deductions and credits!  My kingdom for some deductions and credits!  Sorry, folks, not too many of those left, and even those that remain tend to get wiped out by the despotic alternative minimum tax (known in the profession as the AMT or, alternatively, “salt in the wound.”)

Except for charity.

Thankfully, despite attempts to limit or even eliminate the deduction for charitable contributions, such deductions are still alive and well and can make a dramatic difference in your tax picture if handled wisely.  They are deductible for both regular tax and AMT so, even if you are subject to the AMT, you will still save 26 or 28 cents on the dollar for each charitable dollar donated.  The income limitations are relatively high, but if you give that generously, you will still be able to carry over any excess contributions for up to five years.  And even New York State, which has effectively enacted a flat tax for high net worth taxpayers, still allows you to deduct half your charitable contributions.  Yes, charity is a golden form of tax planning, particularly for the charitably minded.  (Frankly, you may want to skip the rest of this blog post if you are not charitably minded – it never makes sense to give just for the sake of a tax deduction.)

The actual act and form of charitable contribution will vary depending on your situation, so it is important to discuss any plans with your tax advisor.  However, for the charitably minded, it should not be a question of “if” you give to charity, it should be more of a question of “when” and “how much” you give.  The tax benefits should not be the only reason you give, but they certainly make the process more affordable and provide instant (personal) gratification in the form of dollars saved from your income tax bill.


So, here are a few takeaways on yearend charitable giving.  Again, consult your tax advisor on specifics:

  • For most taxpayers, most of the time, giving appreciated long term property to charity is preferable to giving cash.  The reason is you get to deduct the fair market value of the property on the date of the gift rather than its lower cost basis and you don’t have to pay tax on the unrealized appreciation.  This is a two way winner for you.
  • Consider establishing a donor advised fund in tandem with your brokerage or money management account.  Providers such as Schwab and Fidelity make this process very easy.  The existence of the “tandem” DAF makes giving appreciated securities a snap at any time during the year.  Your deduction is immediate but your ultimate distribution to a public charity can be made on your timetable (i.e., this year or later).
  • If your estate and gift planning calls for it, get that private foundation or charitable trust set up now, before year end, so that it can accept contributions for 2013.  Waiting until the last week in December to structure such vehicles in unfair to the attorneys (no lawyer jokes, please) and increases the likelihood of drafting errors.
  • If you donate tangible property such as artwork, be aware of the absolute need for timely appraisals.  Without them your deduction will not stand up to IRS scrutiny.
  • Finally, some odds and ends to consider:
    • Clean out your closets and donate used clothing and household effects (in good condition or better) to a charitable thrift shop.  Be sure to get a receipt, especially if the claimed value is greater than $250.
    • Buy your spouse that new car s/he wants for the holiday and donate the old one to charity.  Restrictions apply.
    • Make sure your annual or yearend commitment to your house of worship is fulfilled.
    • Remember that mere pledges are not considered charitable contributions.  But contributions charged to a credit card are considered paid in the year charged.

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