HORAN Capital Advisors

Year-End Tax Planning Opportunities

With year-end quickly approaching, taxpayers still have a few weeks left to plan ahead with strategies that could provide meaningful tax savings. We included below several planning opportunities to consider before December 31.

Gift Long-Term Appreciated Securities
With equity markets near all-time highs, investors with taxable accounts may hold highly appreciated equity positions. From a tax planning standpoint, gifting long-term appreciated securities is an efficient charitable-giving strategy. With this, the charity receives the same economic benefit as a cash donation, while the taxpayer receives a tax deduction for the full market value of the gift and avoids paying capital gains taxes on the gifted security. 

Investors with a portfolio overweight to equities, due to significant equity market gains, may use charitable gifting as a means to rebalance back to target weights. In doing so, an investor is able to meet philanthropic goals while avoiding having to sell appreciated equities to return to a desired target allocation.

Keep in mind, gifts of long-term appreciated securities to qualified public charities are limited to 30 percent of adjusted gross income (AGI) while similar gifts to a private foundation are limited to 20 percent of AGI. Charitable gifts in excess of the AGI limits result in a charitable carry forward that can be used over the next five years.

Accelerate Charitable Giving (“Bunching”)

Itemized deductions have changed substantially due to the Tax Cuts and Jobs Act of 2017:

  • the standard deduction has nearly doubled
  • personal exemptions have been eliminated
  • the state and local tax (‘SALT’) deduction is now capped at $10,000
  • mortgage interest is deductible on qualified residence debt up to $750,000 for new mortgages (post December 15, 2017) versus a previous $1,000,000 limit
  • interest paid on a home equity line of credit (HELOC) not tied to home improvement is no longer deductible

As a result of these significant changes, more taxpayers will now take the standard deduction rather than itemizing deductions. The Joint Committee on Taxation estimated the number of taxpayers claiming itemized deductions would fall from nearly 47 million in 2017 to 18 million in 2018.

Charitably inclined taxpayers may benefit from a “bunching strategy” whereby several years of charitable gifts are made within a single tax year to produce a large itemized deduction total with the standard deduction to be taken in subsequent years.

Accelerated charitable giving may also be beneficial for taxpayers who have higher-than-normal taxable income in a given year, as increased charitable giving shields a portion of income from otherwise being taxed at a higher rate.

In some instances, taxpayers may wish to utilize this strategy though not necessarily giving this higher amount to charities all in the same year. In such cases, a donor-advised fund can be particularly helpful to get the current year tax deduction while allowing the donor to make grants at a pace of their choosing.

Satisfy Required Minimum Distributions (RMDs) using the IRA Charitable Rollover
Taxpayers over age 70½ are required to take minimum distributions from retirement accounts (except for Roth IRAs). Under the Qualified Charitable Distribution provision, taxpayers over age 70½ can transfer up to $100,000 each year from an IRA to qualified 501(c)(3) organizations (donor-advised funds, private foundations and supporting organizations are excluded).

The taxpayer must be at least 70½ as of the date of the charitable transfer. A qualified charitable distribution neither counts as an itemized deduction nor as taxable income. This provision may be helpful to charitably inclined individuals who now receive a greater tax benefit from the increased standard deduction rather than itemized deductions.

Harvest Losses
Review unrealized gains and losses in taxable investment accounts and harvest losses where available. Realized losses can offset other realized gains. To the extent realized losses exceed realized gains, net realized losses can offset up to $3,000 of ordinary income with any remainder resulting in a loss carryforward to be used in future years.

Beware of the “wash sale rule” stating a loss cannot be realized for tax purposes if a substantially identical position was bought within 30 days before or after the sale. As a practical example, an investor could sell an actively managed equity fund and could redeploy the sales proceeds to an equity index fund. In doing so, the investor recognizes a tax loss while also keeping similar, but not identical, portfolio exposure.

Admittedly, as 2019 has been a remarkable year for nearly all asset classes, investors may have limited opportunities for loss harvesting this tax year.

Taxpayers with assets in excess of the federal estate exemption should consider making annual exclusion gifts ($15,000 per person for 2019 and 2020) which do not count against the exemption amount.

Make Annual Exclusion Gifts
In addition, payments for tuition and medical expenses which are made directly to the educational or medical institution do not constitute gifts. Utilizing annual exclusion gifts as well as direct payments for tuition and medical expenses can be beneficial for high net worth individuals as it effectively reduces the size of a taxable estate.

Contemplating a Change in State Residency
Changing your primary state of residency is not as simple as spending more than half the year in a new state. With many states more aggressively contesting such residency changes, individuals should take extra precaution to ensure “facts and circumstances” support the case for changing resident states. Some of the factors supporting a new domicile include:

  • days spent in the new state for the year
  • driver’s license registration, voter registration
  • medical and dental care providers
  • church attendance and membership, country club or social club memberships
  • official mailing address to which mail and bills are sent, location of family heirlooms and artwork, etc.