04 Nov 27 great tax planning ideas for 2015

by Jerry Lynch, CFP, JFL Total Wealth Management

So it’s the fourth quarter and there is not much time left in the game. If your goal is to reduce your taxes for 2015, you only have a few weeks left. Once Jan. 1 comes around, the game is over and the only thing a CPA can do is to get creative in the scorekeeping, so let’s see what we can do right now to lower these numbers.

When we review with clients to see what we can do to reduce their taxes, our main job is to identify opportunities where we can then discuss with the CPA to make sure these strategies will work. You need to do this as well. The tax system is incredibly complex and while a strategy may seem perfect for you, an issue with the Alternative Minimum Tax (AMT) may negate that benefit. Always confirm this first with your CPA!

Capital Gains

— If you are in a 10 to 15 percent tax bracket (income below $74,900 after deductions), you qualify for tax-free capital gains! If you have gains, take them, wait 31 days, then buy it back if you really like the fund or stock.

—  If you are above the 15 percent tax bracket, sell winners but offset them by selling securities with losses to make the end result neutral. On top of this, you can sell up to another $3,000 of losses to offset ordinary income. In a 25 percent bracket, that saves you $750 and for higher tax brackets, the savings is more.

–Consider giving appreciated securities to charity. This eliminates the capital gain tax that you would have to pay and you still get a full deduction for the contribution. If you do not want to give too much at one time, consider “Donor Advised Funds” that you can set up at any mutual fund company. You get a full deduction this year while having the ability to have the money go to charities at a later time.

Stock Options

Consider the issue of the AMT prior to buying the option. This is a potential tax trap! Balance the concentration of that one stock in your portfolio by having other securities in different industries to provide downside protection.

Retirement Plans

— Maximize your contributions into your retirement accounts. For an individual, that is $18,000 annually, and another $6,000 if you turned 50 this year.

— Possibly do a non-deductible IRA as well, and immediately convert that into a Roth IRA (assuming you have no other traditional IRAs).

Business Owners

Look at your plan designs on your retirement account. In a 401(k), if you are over age 50, you can set aside up to $59,000.

— If you want to do more than that, consider defined benefit (pension) plans that offer unlimited creditor protection and the ability to defer potentially several hundred thousand dollars.

— Long-term care premiums are deductible up to certain limits for business owners and their spouses.

— Expenses: Many things may be deductible through the business (meals, gas, etc.) that may not be deductible to your personally due to phase-outs, thresholds or the AMT.

— Hire your kids: You have to give them money anyway so they might as well work for it. Clean the office, stuff envelopes, etc. Their tax bracket substantially lower than yours and they may qualify to get all or most of their tax money back. Then, use any earned income your kids have to match that with a Roth IRA. They are in the lowest tax bracket of their life and if you only did one $5,000 contribution, in 50 years at 8 percent, the account balance would be $234,508 — tax-free!

High Income Earners

You need to be meeting with your CPA now! A few years back, Congress introduced PEP and PEASE, which sound harmless but they are not. PEP eliminates your personal exemptions so for a family of 5, you just lost a $20,000 deduction. PEASE eliminates your deductions for families with income above $305,050 by up to 80 percent. You are also potentially subject to the new higher capital gains and ordinary income rates, plus the new 3.8 percent surtax. So with these phase-outs, exemption losses and increased taxes, you now have a new business partner — the IRS — which can take over half your gains. Here are a few strategies to consider with investments that are tax-friendly:

— Muni Bonds that are exempt from federal and state income taxes.

— Tax managed accounts that hold stocks for a minimum of one year, offset winners with losses, and have a protractive tax strategy.

— REIT’s and Master Limited Partnerships provide tax benefits on the income that it generates.

— Real Estate: Investment properties are very tax efficient and can provide stable predictable income streams.

— Charitable Trusts: It is possible to give appreciated assets to charity and actually end up with the same or more money on an after-tax basis with careful planning.

— Cash value life insurance is an attractive option to corporate or muni bonds.

— Low costing tax-deferred annuities to shield income from taxes during high tax rate years.

Retirees

Many retirees push off taking money from their IRAs until they hit the year following 70 ½ when they are forced to take out Required Minimum Distributions (RMDs). This creates a tax bomb that raises their incomes substantially for the remainder of their life, often putting them in the highest tax bracket that they have ever been in. A few strategies here:

— Develop a 10- to 15-year proactive tax plan with a financial advisor and CPA. Review the sources of income and develop strategies to determine what income they will take and when.

— Roth Conversions: Done systematically so that they are done within their current tax bracket. Roth IRA’s do not have required minimum distributions.

— Gifting appreciated securities to family members — people in lower tax brackets.

— 529 plans for the grandkids. They grow tax-deferred and while they are considered “completed gifts” by the IRS, you still own and control them. If you want the funds back, they’re yours!

— Company Stock: There is a tax strategy called Net Unrealized Appreciation (NUA) that is available to individuals with company stock in their company retirement account. It works very well on highly appreciated securities and would allow you to only pay ordinary income tax on what the cost of the securities were when they went into your account. Any gain is taxed at capital gains rates which can be 0, 15 or 20 percent — substantially lower than ordinary income rates! This can be a huge tax benefit!

— Manage Medicare insurance premiums with deferral and timing strategies.

Taxes are a huge drag on investment performance and can have a greater impact than inflation, transaction costs or management fees. In spite of all the politicians saying that they will reduce taxes, I really doubt that is possible with an 18.5 trillion dollar deficit.

I do feel that everyone in the U.S. needs to pay their fair share to fund the services that we get from the government, but you don’t have to give them a tip! A proactive tax strategy, especially reviewing the plan now when you can actually have an impact on your taxes, that will pay dividends come this April!

Jerry Lynch is a certified financial planner with JFL Total Wealth Management. He may be reached at or (973) 439-1190.

This story was first posted in November 2015.

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