Charitable Contributions
When making a significant gift to charity, high-net-worth clients should consider giving appreciated stocks or mutual fund shares that they have owned for more than one year. The deduction for the charitable contribution is the fair-market value of the securities on the date of the gift—not the amount the client originally paid for the asset. Clients can boost their tax returns by deducting the appreciated amount—while never paying any taxes on the profit. Keep in mind that if clients expect their income to increase in the next year, they may benefit by waiting to defer charitable contributions and other deductible expenses accordingly.
Minimize Taxes With The Power Of Tax Deferral
An important step in the tax planning process is to help high-net-worth clients leverage the power of tax deferral. You can help your affluent clients diversify between different tax rates and different types of taxes, as well as diversify between taxable investments and tax-deferred vehicles, to help control not only how much they pay in taxes—but also when these taxes are paid.
The power of tax deferral helps achieve tax diversification, to effectively manage the timing of taxes, minimize their impact, and ultimately generate more wealth. With tax deferral, your affluent clients keep more of what they earn by deferring taxes during peak earning years, when they are taxed at a higher rate. Over time, they accumulate substantially more through tax-deferred compounded growth. And when they withdraw income in their retirement years, they are likely to be in a lower bracket and pay less in taxes. There are several tax deferral solutions that allow you to manage and minimize high-net-worth clients' tax obligations:
Max Out Qualified Plans: A fundamental step in any effective tax planning strategy is to max out tax-deferred vehicles such as qualified plans. For the 2016 tax year, contributions to a 401(k), 403(b) or similar workplace retirement plan must have been made by December 31, 2016. The contribution limit to employer-based 401(k) plans remains $18,000 ($24,000 for clients age 50 or older).
To make a tax-deductible contribution into an IRA, this tax season’s deadline is April 18, 2017. The current contribution limit remains $5,500 ($6,500 for clients age 50 or older). Many advisors prefer to wait until this April deadline to evaluate their clients’ tax returns and determine the best way to leverage an IRA. With a Traditional IRA, clients pay no taxes on contributions—and instead wait to pay taxes later when making future withdrawals during retirement. With a Roth IRA they pay taxes on contributions—but make future withdrawals tax-free and penalty-free as long as they are at least 59½.