It’s Time to Make a Year-End Tax Plan

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Use these last few weeks of the year to review your investment portfolio and consider tax, financial and charitable-giving strategies.

The End of the Year is often an opportune time to consider financial and tax-planning strategies. Even though Congress and the president continue to joust over the federal deficit and there is increased discussion regarding “comprehensive tax reform,” there have not been any significant changes in individual taxes this year.
 
Consider using these last few weeks of the year to review your investment portfolio and consider tax, financial and charitable-giving strategies. Remember, it is generally advisable to engage tax and investment professionals to “run the numbers” before taking final action!
 
2014 Tax Rates: Early last year, Congress passed the American Taxpayer Relief Act, known as ATRA, which permanently extended the Bush-era individual income tax rate cuts for most taxpayers. It also put in place a top income tax bracket of 39.6 percent for higher-income taxpayers, with taxable income over $450,000 for married taxpayers and $400,000 for individuals.
 
ATRA also reintroduces a phase-out of itemized deductions (the so-called “Pease” limitation) that reduces the benefit of certain deductions, including mortgage interest or state and local taxes, by 3 percent of the adjusted gross income above $300,000 for married taxpayers and $250,000 for individuals up to a maximum of 80 percent of deductions claimed.
 
In addition, “high-income taxpayers,” with adjusted gross income in excess of $250,000 for married couples and $200,000 for singles, face additional taxes that were designed to help pay for the Affordable Care Act, known as Obamacare. In general, an additional 3.8 percent Medicare tax is imposed on investment income, such as capital gains, in excess of $250,000 for married taxpayers and $200,000 for individuals.
 
Further, an additional 0.9 percent tax is imposed on wage income above these thresholds. Because the top tax rates have jumped significantly, certain strategies to defer income and accelerate deductions may be more important than ever for many taxpayers before year-end.
 
Shift Income and Deductions Where Possible: Tried and true year-end tax strategies generally revolve around shifting some tax burden to a future year. Deferring receipt of a bonus payment to 2015, accelerating deductions into 2014 by prepaying a deductible expense, or making larger charitable gifts all can lower this year’s bill, leaving those saved tax dollars in your pocket rather than the government’s.
Keep in mind, however, that you need to factor in the “alternative minimum tax” to determine if shifting income and deduction strategies provide maximum savings in your financial situation.
 
Recognizing Investment Gains and Losses: Timing the recognition of capital gains and losses helps maximize offsetting short-term gains taxed at ordinary income tax rates with short-term losses.
 
Perhaps more importantly, the top rate for long-term capital gains (those held for more than one year) is now 20 percent for taxpayers in the 39.6 percent income tax rate bracket ($450,000 married taxpayers and $400,000 individuals). The tax rate actually reaches 23.8 percent when you factor in the health care surtax.
 
There are a number of charitable giving strategies that can be used to avoid the capital gains tax, such as donating appreciated stock to create a donor-advised fund at the Federation (called a Philanthropic Fund) or adding such securities to an existing Philanthropic Fund.
 
Remember, however, in cases where the current fair-market value of the stock remains below your cost basis, it most likely makes sense to sell the stock first, recognizing the tax loss, and then gift the proceeds to charity.
 
Charitable Giving at Year-end: Accelerating or increasing charitable contributions at year-end is among the most effective planning strategies to reduce your tax liability and get needed financial support into the hands of your favorite charity sooner.
 
Some year-end points to remember: (1) gifts by check are considered complete this year as long as they are dated and mailed by Dec. 31, even if the charity doesn’t cash the check until January 2015; and (2) pledges and other obligations cannot be deducted unless actually satisfied by Dec. 31. 
 
IRA Charitable Rollover Not Yet Extended: Over the past seven years, many individuals over age 701⁄2 have utilized the IRA charitable rollover to transfer up to $100,000 each year from their retirement accounts directly to public charities.
 
Unfortunately, the IRA Charitable Rollover expired at the end of last year and, as of now, Congress has not yet acted to put the provision back into the law. 
Because the interaction of the IRA Charitable Rollover and the IRA required minimum distribution rules, if you are considering a rollover of retirement funds to charity, it is advisable to contact your philanthropic adviser at the Federation before taking any action.
 
Even if the IRA Charitable Rollover provision is not extended for 2014, you may want to consider using your IRA assets as the pool from which you fund charitable year-end gifts. You would pay income tax on the IRA distribution but would also receive a charitable income tax deduction for your gift. 
 
Estate and Gift Strategies to Consider: ATRA also brought some certainty to estate planning, setting the maximum estate tax rate at 40 percent. It also provided for the portability of the $5.25 million per spouse exemption from the estate tax.
 
In some circumstances, you may want to consider making large gifts or transferring appreciated property to intended beneficiaries before year-end. Other gifting and estate planning strategies to consider include gifts in trust, and other more complex transfer transactions, such as use of life insurance trusts, grantor retained annuity trusts and others. Both your tax adviser and planned giving professional can help here.
 
Giving Techniques and Interest Rates: A number of other techniques deserve special consideration as interest rates remain relatively low. A charitable lead trust, a planning vehicle where the trust pays income to a charity for a period of years and subsequently transfers the trust property to others, including family members, can provide a current charitable gift as well as reduce federal transfer tax.
 
Grantor retained annuity trusts should also be considered to shift appreciating assets to others at little or no gift tax. Intrafamily loans to children or family members also can be attractive as long as IRS interest rates remain substantially lower than commercial interest rates.
 
The Federation can help you maximize your gift to the Jewish people. For more information, contact Rachel Gross, director of Planned Giving and Endowments, at: [email protected] or 215-832-0572, or Jennifer Brier, senior endowment officer, at: [email protected] or 215-832-0528. 
 
This letter is for informational purposes only and should not be construed as legal, tax or financial advice. When considering gift planning, consult your own legal and tax advisers.

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