Year-End Tax Tips

Can you believe it's November already? As the end of the year approaches, some tax tips may be helpful. There are two primary categories I'd like to discuss: Tax neutrality on gains and losses and charitable giving.

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Tax Neutrality:

A strong stock market year like 2017 increases the likelihood of taxable sales activity. Let's first visit realized and unrealized gains. Gain activity is only taxable in the year you sell something; when the profit occurred is not relevant. Holding a profitable position is an "unrealized gain." Selling a profitable position is a "realized gain" and is taxable in the year of sale. The same is essentially true for losses (unrealized or realized loss), except that realized losses can offset realized gains in the same year, plus a $3,000 further deduction against ordinary income. Exceeding the limit also allows deductibility to be carried over for 15 years forward. This is called tax-loss carryforward. Accordingly, the optimal tax effect would likely be found where $20,000 in realized gains were matched with $23,000 in realized losses. The only thing better is having no losses.

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Charitable Giving:

Many people make year-end deductible contributions to churches and other charities. These contributions are only deductible if you itemize deductions. This activity can take some time to complete, so we recommend you think about giving now. Your advisor or broker may not be able to complete gifts at year end if instructions come after December 15th.

Many of our clients also make great use of gifting appreciated securities instead of cash. This transfers the capital gain to the tax-exempt charity. That makes for more powerful giving at less cost to the donor. Remember that this type of activity has limits to deductibility. Cash giving cannot be deducted beyond 50% of adjusted gross income (AGI), and giving appreciated securities is capped at 30% of AGI. In any tax year that the deductible cap is reached, overages can be carried forward to deduct in future years.

We are also big advocates of using a donor advised fund (DAF) for charitable giving. A DAF is a staging area for future giving. Digging up receipts becomes a thing of the past. Simply donate securities or cash in larger lumps and spread your giving out over years if you wish. The contribution to the DAF is deductible in the year it occurs and the gifts can be distributed over time. The DAF is also a 501(c)(3) tax-exempt organization, making your gift permanent and deductible. The DAF's sole purpose is to hold and invest your gift until you designate where you want the next check sent. It's quite efficient.

Lastly, IRAs can also be used to gift up to $100,000 annually to charities of your choice. This is particularly appealing to older individuals who may be staring at required minimum distributions (RMD) for IRAs based on age. They may not need the cash or want the taxable income. Giving from an IRA gets around the deductible issue because the money is already pretax. There are many ways this tool could be more powerful than giving cash or securities.

If we can help you with any of these issues or answer questions, please give us a call. You may also check with your tax advisor on strategies specific to your situation because we don't give tax advice.

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