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Volume 10, Issue 10
The Wealth Counselor
Don’t Miss Out on These Year-End Tax Planning Strategies
Now is the ideal time to start year-end tax planning so that credits and deductions can be maximized before the December 31st deadline.  Below you will find a variety of tax-saving strategies clients should consider using immediately so that they can get their 2015 tax house in order well in advance of the fast-approaching holiday season.

Plan Now for a Bountiful Fall Harvest

The last thing clients want to worry about during the holiday season is tax planning. Now is the perfect time to discuss the following tax-saving opportunities with clients so they can implement them in the next few weeks:

  • Check the portfolio to determine which dud stocks can be sold to harvest losses and offset gains – keep in mind that short term losses are the most effective for offsetting capital gains and advisors must wait at least 31 days to buy back that dud stock to avoid the IRS wash sale rule.


  • For clients in the 25% or higher marginal federal income tax bracket who hold mutual funds in taxable accounts, check mutual fund families’ websites for projected capital gains distributions in November and December. Given six strong years for many funds, coupled with any 2015 investor defections, the distributions could be surprisingly large for some funds. Selling before the ex-dividend date and moving to a similarly allocated but more tax-efficient vehicle like an exchange-traded fund (ETF) may make sense for some clients.


  • Analyze 2015 vs. 2016 projected tax liabilities and accelerate or decelerate income and capital gains accordingly.


  • Maximize contributions to 401(k)s and IRAs – those age 50 and over should take advantage of the extra $1,000 (for an IRA) or $6,000 (for a 401(k)) they can contribute to their accounts in 2015.


  • Wipe out that Flexible Spending Account by purchasing new glasses, contact lenses or incurring other medical expenses.


  • Purchase an electric car.


  • Install a renewable energy source in the home such as a solar-powered water heater.


  • Refinance a mortgage.


  • Make an extra mortgage payment or two.


  • Pay estimated state and local taxes and property taxes.


  • Review and adjust withholding and estimated tax payments to ensure that underpayment penalties will be avoided.


  • Determine if a traditional IRA should be converted to a Roth IRA – factors to consider include the client’s current and future anticipated tax status, family situation, and the ability to pay the tax due from other sources.


  • If you use a Roth conversion strategy, consider converting twice as much as you would want to, but in separate accounts, with the intent to recharacterize back to an IRA the poorer performing of those two Roth conversions before the October 15, 2016, cutoff.


  • Trustees of irrevocable trusts should consider whether it is appropriate under the discretionary terms of the trust agreement to disperse distributable net income (DNI) to beneficiaries in lower tax brackets.


  • Business owners with consistent excess cash flow looking for potentially sizeable deductions translating into a retirement pension could consider a defined benefit plan. It is not without risks, but see a high-level expansion of this idea below.

Planning Tip: Tax planning is never one-size-fits all, or even most. In fact, what may be tax-advantageous for one client may be tax-detrimental for another. For example, the Alternative Minimum Tax (AMT) is snagging more and more taxpayers. Those who have substantial deductions, such as taxpayers who live in a state with a high personal income tax rate and high real estate taxes, are potential victims of the AMT and reducing regular tax liability for these taxpayers through deductions will increase their AMT exposure. Thus, tax planning must be done on a case-by-case basis in view of each client’s unique family and financial situations. Before making any year-end tax moves, clients must consult with their financial team to ensure that the moves they make are the right ones.

Plan Now for an Early Gift-Giving Season

While traditionally the holiday season is the time for giving thanks and exchanging gifts, clients should consider making gifts sooner rather than later to avoid the year-end rush. Below are some gifting ideas clients can use now to benefit family, friends, their church, their alma mater or those in need:

  • Make cash gifts to family and friends – in 2015 the maximum amount that an individual can give without incurring a gift tax is $14,000; married couples can give $28,000.


  • Make cash gifts to non-profit organizations.


  • Donate appreciated assets, such as stock or real estate, to non-profit organizations.


  • Set up a donor-advised fund – clients should work with their financial advisor to select the right company or community foundation to set up their fund.


  • Supercharge a 529 plan for children or grandchildren – affluent individuals can contribute $70,000 and affluent couples (parents and grandparents, but most likely grandparents) can contribute $140,000 to a plan without incurring any gift tax; in addition, some states offer tax deductions or credits against 529 contributions.


  • In this low interest rate environment, inter-family loans are worth considering – intra-family loans allow clients to lend money to family members at a lower interest rate than a bank or corporate lender and can be a powerful tool to transfer wealth without incurring any gift or estate tax.


  • If a client is considering any advanced gift planning, such as gifting through a grantor retained annuity trust, family limited liability company or private foundation, then time is of the essence to get the trust or entity created, funded and initial gifts made before December 31.


  • Remind affluent clients who have used up their entire lifetime gift tax exemption in prior years that they have gained an extra $90,000 (or $180,000 per married couple) to gift in 2015.


  • Advisors who are managing IRAs for clients who are over age 70½, need deductions and are charitably inclined should stay alert for year-end legislation that allows individuals to donate up to $100,000 from an IRA and exclude the donation from taxable income.

Planning Tip:  Certain payments made for educational or medical expenses are not considered gifts at all:

  • Payments for educational expenses are not taxable gifts if the payment (1) is made directly to the institution providing the education, not to the individual receiving the education, and (2) is for tuition only.
  • Payments for medical expenses are not taxable gifts if the payment (1) is made directly to the institution that provides medical care to an individual or to the company that provides medical insurance to an individual, and (2) the medical expense is of the same type that is deductible for income tax purposes.

Thus, in 2015 a grandfather can pay for his granddaughter’s emergency appendectomy ($20,000), the same granddaughter’s tuition for her fall semester of college ($8,000), and still gift the same granddaughter $14,000 for Christmas without incurring any federal gift tax liability.

Defined Benefit Plans Concept Overview

Successful business owners and professionals need to minimize current taxes, save for a comfortable retirement and provide competitive benefits to attract and retain employees. Defined benefit pension plans can be an excellent way to achieve these goals.

  • Tax advantages – Defined benefit plans offer one of the largest plan tax deductions allowed by law. In fact, the size of the contribution can be as large as is actuarially determined to obtain the desired result, which at its federally-set maximum is now a pension up to $210,000 a year. Depending on the age and income of the owner, that could mean allowable annual contributions at least that large. Plus, the tax advantage is open to all business entities, including often challenging pass-through entities.


  • Timing of contributions – these can be made as late as 8.5 months after the end of the plan year (though on or before the due date of the tax return, with extensions).


  • The option of guaranteed retirement benefits – Has your client lost a portion of his or her current retirement plan to mismanaging a diversified investment portfolio, and now is wary about investment? Then two options for the investment component of a defined benefit plan could be fixed annuities and fixed life insurance products for a guaranteed retirement benefit.


  • Life insurance in a defined benefit plan is tax-deductible – If the business chooses to add life insurance in their defined benefit plan, the life insurance premiums are tax deductible to the business. Employing discounted pre-tax dollars provides true leverage for the business owner who needs insurance protection. A defined benefit plan is one of the very few ways to pay for life insurance with pre-tax dollars.

Top Candidates for Defined Benefit Plans

  • Highly profitable small businesses with fewer than 10 employees where the owner(s) have a desire for a large tax deduction.
  • Law firms and medical groups – Tax deferral and asset protection are often very important to these professions.
  • Older business owners who have delayed saving for retirement. Often these business owners have sunk their revenue right back into the business to keep it growing, while neglecting their retirement plans. A defined benefit plan can allow them to catch up on saving for a comfortable retirement.

Begin Year-End Tax Planning Right Now

Ideally tax planning should be done throughout the year, but unfortunately most people do not even start thinking about their tax situation until late into the fall. Doing nothing at all will leave less in the client’s pocket and planning done at the eleventh hour may end up sloppy and incomplete. As always, we are here to assist you and your clients with their year-end tax planning. We encourage you to call us to discuss your questions so we can ensure that your clients are taking full advantage of all appropriate year-end tax saving opportunities.

Law Offices of J.R. Hastings • 1003 Third Street, San Rafael, California 94901 • 415-450-6692

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