Although the official tax planning season starts in January, there are year-end moves you can consider now to help cut your tax burden come April 17, 2018. Since the deadline for most strategies is December 31, take time now to speak with your Financial Advisor and tax professional to review appropriate strategies and put plans in place.
1. Review your income and portfolio
- Work with your Financial Advisor to consider a tax-planning move known as tax-loss harvesting. “Harvesting" all of your losses, including unrealized losses, allows you to offset taxes on gains and income. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. Be sure to look at all sources, including businesses, outside sales and private partnerships. Morgan Stanley can provide this service to you through Tax Management Services for Select UMA. You may want to meet with your Financial Advisor to consider some of these year-end trades.
- Take inventory of any assets that have appreciated substantially in value. If you choose to sell them, you can consider offsetting those gains against losses in your portfolio, or donate the appreciated securities as a charitable contribution.
- Keep track of capital loss carryovers from prior years. If your capital losses exceed your capital gains in a given year, you can carry over those excess losses to offset capital gains in subsequent years until the losses are used up. After losses offset capital gains, up to $3,000 of net capital losses can be used to offset ordinary income each year.
- Make your investment portfolio as tax efficient as possible. This may or may not put a dent in your tax bill this year, but it can make a big difference for 2018 and beyond. Investors typically focus only on risk and return, but tax efficiency should be a consideration as well. Dividend paying stocks, for instance, might not make sense if the income they produce considerably adds to your tax burden.
- Work with your tax advisor to estimate adjusted gross income and tax rate to figure out if you need to pay any alternative minimum tax (AMT). Alternative minimum tax sets a limit on certain tax benefits but there are strategies to reduce this liability, such as by deferring or accelerating income.
- If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017 if you won't be subject to AMT this year.
2. Review your retirement accounts
- If you’re at least 70½, you have the ability to make charitable contributions of up to $100,000 per year directly from your IRAs to an eligible organization without incurring any adverse federal income tax consequences.
- Consider a Roth IRA conversion. High earning individuals can't invest directly into Roth IRAs, but can transfer assets from a traditional to Roth IRA. The amount converted is subject to ordinary income tax but provides future tax-free growth potential. This strategy can work for taxpayers who will not need minimum distributions from their retirement account during retirement and plan to leave their retirement accounts to their children. Keep in mind, however, that such a conversion will increase your adjusted gross income (AGI) for 2017.
- Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). If you turned 70½ prior to 2017, you need to take an RMD from your IRA1 or 401(k) plan (or other employer-sponsored retirement plan) by December 31, 2017. Failure to take a required withdrawal by the deadline can result in a penalty of 50 percent of the amount of the RMD not withdrawn. If you turned 70½ during 2017, you are required to start taking RMDs, although your first distribution may be delayed until April 1, 2018, which is your “Required Beginning Date.” If you choose to elect this option, you must take a double distribution in 2018—the amount required for 2017 plus the amount required for 2018 (after the year in which you attain age 70½, RMDs must be taken by December 31 of each year). Think twice before delaying 2017 distributions to 2018 as bunching income into next year might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you anticipate falling into a substantially lower bracket that year.
- Taxpayers who have already maxed out their 401(k)s, IRAs and other retirement accounts could consider putting additional savings into variable annuities. Like a 401(k) plan or IRA, assets in a variable annuity maintain tax-deferred growth potential until they are withdrawn by the contract owner. When the time comes to retire, you can elect to receive regular income payments over a specified period or spread over your lifetime. Many annuities also offer a variety of living and death benefit options, usually for additional fees.
- Do you hold international securities in your investment accounts? Investors holding international securities are often subject to withholding tax by a foreign government on investment income (dividends and interest). If double taxation treaties exist between the country where the investor resides and where the issuer of the security is based, investors are entitled to reclaim all or some of this money but must do this within the statute of limitations. Talk to your Financial Advisor about the tax reclaim services available through Globe Tax Services, Inc.
3. Take advantage of smart gifting
- Appreciated investments that have been owned for more than a year can be donated to “qualified charitable organizations.” One option to consider is gifting those appreciated investments to a donor-advised fund (DAF), such as the Morgan Stanley Global Impact Funding Trust (MS GIFT), which gives taxpayers a tax-efficient way to donate stock, mutual funds or other assets and claim a tax deduction.2 A donor-advised fund provides a simple and effective way for you to direct gifts, year-round, to your favorite charity from a single account.
- Make gifts sheltered by the annual gift tax exclusion before the end of the year and save on gift and/or estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. Note that you can’t carry over unused exclusions from one year to the next. The transfers may help your family as a whole pay fewer taxes if you give income-earning property to family members in lower income tax brackets who are not subject to the Kiddie Tax.
- Consider giving gifts through a 529 education plan. The tax code allows up to five years of gift tax exclusions in a single year, which is as much as $70,000 per recipient or $140,000 per recipient for married couples.3
- Consider, in the context of lifetime tax strategy, the estate and gift tax exemption, which is $5.49 million for 2017. This means that an individual can leave $5.49 million, or a married couple can leave $10.98 million, to heirs over the course of their lifetime without paying a federal estate or gift tax. Note that the annual exclusion gifts of $14,000 discussed above don’t count towards the lifetime gift exemption.
- As always, speak with your Morgan Stanley Financial Advisor or Private Wealth Advisor (or find one here) and your personal tax and legal advisors to determine which strategies might be appropriate for you.