September 11, 2017 • Jeff Stimpson
The last quarter is a good time to fine-tune clients’ tax situations before the year runs out. Though the U.S. tax code has relatively few breaks expiring at the end of 2017, looming tax legislation reinforces the importance of some fundamentals of tax planning, advisors say. “One basic principle of tax planning is to defer income and accelerate deductions,” says Barry Kleiman, CPA at Untracht Early in Florham Park, N.J. “This holds true even more in today’s environment given the proposals to reduce individual income tax rates and eliminate or cap certain itemized deductions.” In general, you should aim to help your client achieve the lowest overall tax for both 2017 and 2018, according to CPA Sheila Eichelberger of SB & Company in Hunt Valley, Md. If shifting income and deductions between 2017 and 2018 doesn’t reduce overall tax liability, try to defer as much tax liability as possible from 2017 to 2018, she says. “Generally,” she adds, “income should be received in the year with the lower marginal tax rate while deductible expenses should be paid in the year with the higher marginal rate. Potential alternative minimum tax should be considered when deciding to defer income or accelerate deductions.” For example, year-end bonuses or early-retirement buyouts can complicate a tax situation at the last minute. “It may be worth negotiating a split payment, with a portion to come after the first of the year,” says Gary Brooks, financial planner with Brooks, Hughes & Jones in Gig Harbor, Wash. If your client owns investments that declined in value, “capital losses you incur can offset your capital gains plus up to $3,000 of other income, and any excess capital losses can be carried forward indefinitely for federal tax purposes,” says Gail Rosen, CPA with Wilkin & Guttenplan in Martinsville, N.J. “Selling losers or depreciated securities before Dec. 31 may be a good idea since such capital losses will offset capital gains from other 2017 sales, including short-term gains from securities owned for one year or less that are typically taxed at the top tax brackets,” says Martin Abo, CPA and managing member of Abo and Company in Mt. Laurel, N.J. “Any excess net capital loss is carried over to future years. Of course, state taxes should be considered.” The ongoing bull market might also make the end of the year a tempting time for clients to sell off well-appreciated stock to guard against a rise in capital gains taxes. “But if you think the stock still has significant upside to it, don’t sell just for tax reasons,” says John Stancil, a CPA in Lakeland, Fla. Aaron Blau, a CPA and enrolled agent in Tempe, Ariz., says, “Taxpayers who were once underwater on residential properties have now emerged from negative equity. Unfortunately, in the time it took for them to rebound, significant depreciation has taken place. This means that many taxpayers who may be selling their rental property and breaking even from a cash perspective, must pay tax on the unrecaptured Section 1250 gain. For high-income individuals, this may not be a problem, as they may have a [prior year’s] passive activity loss carryforward to offset the gain.” Charitable giving is one favorite tactic to accelerate expenses, and your clients can prepay charitable donations that they would otherwise make next year. Most people simply make charitable donations with cash, but it’s more tax-efficient to gift appreciated stock or use qualified charitable distributions that satisfy IRA required withdrawals, Brooks says. First « 1 2 » Next
“One basic principle of tax planning is to defer income and accelerate deductions,” says Barry Kleiman, CPA at Untracht Early in Florham Park, N.J. “This holds true even more in today’s environment given the proposals to reduce individual income tax rates and eliminate or cap certain itemized deductions.”
In general, you should aim to help your client achieve the lowest overall tax for both 2017 and 2018, according to CPA Sheila Eichelberger of SB & Company in Hunt Valley, Md. If shifting income and deductions between 2017 and 2018 doesn’t reduce overall tax liability, try to defer as much tax liability as possible from 2017 to 2018, she says.
“Generally,” she adds, “income should be received in the year with the lower marginal tax rate while deductible expenses should be paid in the year with the higher marginal rate. Potential alternative minimum tax should be considered when deciding to defer income or accelerate deductions.”
For example, year-end bonuses or early-retirement buyouts can complicate a tax situation at the last minute. “It may be worth negotiating a split payment, with a portion to come after the first of the year,” says Gary Brooks, financial planner with Brooks, Hughes & Jones in Gig Harbor, Wash.
If your client owns investments that declined in value, “capital losses you incur can offset your capital gains plus up to $3,000 of other income, and any excess capital losses can be carried forward indefinitely for federal tax purposes,” says Gail Rosen, CPA with Wilkin & Guttenplan in Martinsville, N.J.
“Selling losers or depreciated securities before Dec. 31 may be a good idea since such capital losses will offset capital gains from other 2017 sales, including short-term gains from securities owned for one year or less that are typically taxed at the top tax brackets,” says Martin Abo, CPA and managing member of Abo and Company in Mt. Laurel, N.J. “Any excess net capital loss is carried over to future years. Of course, state taxes should be considered.”
The ongoing bull market might also make the end of the year a tempting time for clients to sell off well-appreciated stock to guard against a rise in capital gains taxes. “But if you think the stock still has significant upside to it, don’t sell just for tax reasons,” says John Stancil, a CPA in Lakeland, Fla.
Aaron Blau, a CPA and enrolled agent in Tempe, Ariz., says, “Taxpayers who were once underwater on residential properties have now emerged from negative equity. Unfortunately, in the time it took for them to rebound, significant depreciation has taken place. This means that many taxpayers who may be selling their rental property and breaking even from a cash perspective, must pay tax on the unrecaptured Section 1250 gain. For high-income individuals, this may not be a problem, as they may have a [prior year’s] passive activity loss carryforward to offset the gain.”
Charitable giving is one favorite tactic to accelerate expenses, and your clients can prepay charitable donations that they would otherwise make next year. Most people simply make charitable donations with cash, but it’s more tax-efficient to gift appreciated stock or use qualified charitable distributions that satisfy IRA required withdrawals, Brooks says.
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