As the end of 2017 approaches, there are several tax planning moves
you can make for your clients to minimize their upcoming tax
liabilities. Not every option will work for every taxpayer. However,
with a little planning, you might save your clients a lot of money.
It may seem futile to plan when there are new tax proposals on the
table. But at this point, we can feel certain that any tax law
amendments will result in either no change or a decrease to your
clients’ tax bills. With that in mind, let’s take a look at some
year-end tax planning strategies.
4 year-end tax planning strategies
Recognition of income and expenses. Traditional
year-end tax planning looks to accelerate expenses and defer income.
This keeps your clients’ taxable income as low as possible in the
current year. There are various tactics to achieve this, such as
postponing non-required IRA withdrawals, tax-loss harvesting, and
prepaying property taxes. With the proposed top rate dropping to 35
percent from 39.6 percent, many of your clients might expect lower
tax rates next year. Therefore, deferring income and accelerating
deductions can be especially beneficial this year. There are times
when this strategy does not make sense—for example, when a client is
expecting a higher tax bracket the following year. In this case, you
may want to recommend recognizing as much income as possible in the
current year and delaying the expenses until the following year.
Even if your client is not expecting to be in a higher tax bracket,
it might make sense to postpone some deductions that are currently
subject to the Alternative Minimum Tax, or AMT. For example, clients
subject to the AMT do not get a tax benefit for state or property
taxes paid. Thus, waiting to pay these expenses in 2018 could
convert a non-deductible expenditure to a deductible expense should
the AMT be eliminated.
Roth conversions. If you have clients in a low tax
bracket, they might be able to convert a portion of their IRAs to Roth at
little to no extra tax cost. Whenever IRA money is converted to a
Roth IRA, tax is due on the amount of the conversion in the year of
the conversion. The money in the Roth IRA will then grow tax-free
for the remainder of the owner’s life and can pass to heirs
income-tax free. Distributions from a Roth IRA are also tax-free,
and there are no required minimum distributions.
Prepaying state taxes. If your client is in AMT,
there is no federal tax savings from paying a fourth-quarter
estimate or estimated state balance due by Dec. 31, 2017. Waiting
until 2018 to pay could mean no more AMT (based on current tax
proposals), but it could also result in no deduction since
eliminating state tax deductions is also proposed. So if your client
is in AMT, don't recommend prepaying state taxes. At worst case, at
least they will benefit from the time value of money. If your client
is not in AMT in 2017, your client should prepay because there is a
chance that no deduction will be allowed in the future.
Charitable giving. Charitable giving can reduce tax
liabilities even for clients that are subject to the AMT. There are
several options when it comes to charitable giving. If your client
has a high-income year, a donor-advised fund could be very
beneficial. With such a fund, the donor receives a deduction in the
year of his or her contribution to the fund. The money stays in the
fund and earns income tax-free until the donor decides to make
distributions to charity, either right away or over time. An
especially tax-efficient way of contributing to a donor-advised fund
or specific charity is by donating appreciated stock or mutual fund
shares. The client will receive a deduction for the full fair market
value without paying tax on appreciation. The advisor can provide
essential assistance by identifying holdings with the greatest
accumulation of unrealized gains.
Using these year-end tax planning strategies to proactively save
clients' tax dollars can up your game and increase client
satisfaction. Want more? Watch a recording of our webinar on year-end tax planning strategies.
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