It’s Tax Filing Season: Did You Take Advantage of Financial and Charitable Strategies?

Posted April 2018

If March Madness describes the three-week college basketball tournament that ends April 2, then April Madness describes tax time. Yes, it's that dreaded time of the year again, almost the day of reckoning with the IRS. It is also a propitious time to assess how effective you were in planning your tax strategy for the previous year, including the benefits of philanthropy.

Take a few minutes to answer the following questions. This will help you evaluate your tax-planning performance, and we hope it might help you improve your outcome next year when April Madness rolls around again.

Capital-Gain Strategies
Any gain or loss is just a paper transaction until you actually sell an investment. When you do, the gain or loss shows up in your tax picture. Because you control the timing of buy-and-sell decisions, you have significant control over the impact these transactions have on your taxes.

Issue 1: Did you sell losing stocks before year-end to generate a realized capital loss?
Your capital gain and loss are “netted against each other” to determine the amount and nature of what you report on your tax return. If you have realized gain during the course of the year, it is generally a good idea to sell some of your losers to offset that gain. Remember, though, you have to wait more than 30 days to buy a stock back or you cannot recognize the loss for tax purposes. Even if you do not have gain to offset, you can use loss to offset up to $3,000 of ordinary income.

Issue 2: Did you wait until after the end of the year to sell a stock at a gain?
Sometimes delaying a sale just a few days can push the tax consequences into the next tax year. Again, don’t let tax considerations alone dictate your decisions. If you believe a stock is sinking fast, it may be better to sell and deal with the tax consequences than to risk further erosion of the price of the stock.

Issue 3: Did you claim a charitable deduction on your tax return?
If you itemize deductions, your charitable-contribution deductions generate tax savings proportional to your marginal-tax bracket.

Example: Last year Phil made a $10,000 gift to us. Because Phil was in the 33% federal income-tax bracket (changing for 2018 to 35%), that gift saved him $3,300 (33% x $10,000) in taxes.

Issue 4: Did you accelerate this year’s charitable gift into last year in order to reap the benefits of itemizing?
For many taxpayers, itemized deductions come close to equaling the standard deduction each year but never quite meet that amount; consequently, they elect to use the standard deduction. If you find yourself close to but short of the standard-deduction threshold, you might consider doubling up on your charitable giving this year and skipping next year. You will realize savings to the extent your extra gift causes your itemized deductions to exceed the standard deduction. Keep in mind, though, that the standard deduction will almost double for each filing status in 2018.

Issue 5: Did you use long-term appreciated securities or real estate to make your charitable gift?
If you use long-term appreciated securities or real estate to fund your charitable gift, not only can you deduct its full fair-market value from your taxes, but you also avoid recognizing or paying tax on the appreciation.

Example: Ruth G contributed stock worth $30,000 that she had bought five years ago for $10,000. If she had sold the stock, she would have faced a tax of $3,000 on her $20,000 gain ($20,000 x 15% capital-gain tax rate). In her 35% federal tax bracket, the $30,000 gift produced $10,500 of income-tax savings as well ($30,000 x 35%). Her total savings are $13,500.

Issue 6: Did you make a contribution to a tax-advantaged retirement program last year?
Combining objectives: If you have major charitable goals in addition to a desire to enhance your retirement security, with some creative planning you can address both objectives simultaneously. You can make charitable gifts that pay you income for life—and often such plans can be arranged so that most or all of the income is paid after your retirement.

Issue 7: Did you establish a charitable life-income gift last year?
Example: Don G, aged 70, watched his stock portfolio grow over the years. He has seen some of that gain disappear and is concerned about the future direction of the market. Now that he is retired, he would also like to get a higher return from his investments—most of his stocks pay little or no dividends—but is reluctant to sell and experience major capital gain.

Don decides to use growth stock currently worth $100,000, purchased years ago for $20,000, to create a charitable remainder unitrust that will pay him 6% of its annual value. This will produce a charitable deduction of approximately $46,750, saving him about $16,360 in his 35% tax bracket. Better still, he will not have to pay any tax on the $80,000 gain when he transfers the stock to the trust—a savings of $12,000. The first year Don will receive payment of $6,000—a $6,000 net increase in cash flow because the stock he used to create the trust paid no dividends.

We would welcome the chance to discuss how this or another type of life-income plan can address your retirement-planning and charitable goals. Please contact us if we can be of assistance.

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