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Expert Insights for Smart Financial Planning

A Comprehensive Guide to Your Year-End Financial Planning

We put so much emphasis on the return of our investments, but often neglect the ins and outs of estate planning, taxes, insurance, and retirement funds. Not here.


Wealth planning is far from a static process, but is rather very dynamic. There's a well-known saying that two things in life are certain: death and taxes. Well, there's a third thing that is certain as well: change. Life events happen: jobs change, children are born, couples wed and get divorced, children go to college, homes are bought and sold, people enter retirement and so on. On top of these life events, rules and regulations change. For example, there have been more than 5,000 tax-code changes since 2001, and Social Security rules recently changed. Combined, these events impact the course of efficient wealth planning and create the need to review and refine one's plan on a regular basis.

See Also: 7 Smart Ways to Lower Your Taxable Income

Prudent wealth planning is about protecting and making the wealth you've accumulated more efficient. This comes in the form of careful estate, tax, insurance and philanthropic planning, and there's no better time for a thorough plan review than year-end. This exercise is most effectively done with a wealth manager taking on the role as your “Personal CFO" -- someone who oversees all aspects of your wealth plan and coordinates and manages the efforts between your other professional advisers.

If you aren't working with a comprehensive wealth manager, then the following is intended to give you some year-end planning ideas to consider and discuss with your advisers:


Estate Planning

The federal gift and estate tax exemption, which is currently set at $5.43 million, is projected to increase to $5.45 million in 2016. The American Taxpayer Relief Act (ATRA) set the maximum estate tax rate at 40%. Although taxes are the single largest wealth-eroding force, the importance of estate planning stretches well beyond just taxes. Other important benefits from trusts and wills is to be able to control your legacy and to determine how you would like your wealth distributed and to whom. Trusts and wills also keep estates from being subject to the lengthy, costly and public probate process, and they shelter assets from ex-spouses and creditors.

Since reducing taxes is one of the main motivations behind using different trust strategies, below are some ways to potentially reduce your estate taxes.

For many, estate planning begins with mitigating the tax bite. One approach to transfer wealth tax-free is by gifting to family members. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax. Gifts are exempt from the gift tax for amounts up to $14,000 a year per recipient. Any unused annual exemption doesn't carry over to later years. To make use of the exemption for 2015, you must make your gift by December 31.


Spousal joint gifts to any third person are exempt from gift tax for amounts up to $28,000 ($14,000 each). If a joint gift is given, both parties need to consent to such "split gifts." If gifting to a 529 college savings plan, you can gift up to $70,000 (per spouse) in one year and stretch that amount over five calendar-year periods for gift tax purposes. This means that a combined spousal gift to a 529 could amount to $140,000.

A good strategy with property that you expect to increase in value is to give it to the next generation. Shifting future appreciation to your heirs keeps that value out of your estate, but this can trigger IRS questions about the gift's true value when given. You also need to consider the fact that there will be no step-up in basis (the cost you bought the property for), which might be a larger tax savings than transferring assets out of your estate.


There’s plenty to think about on the year-end tax-planning front, so here are a few ideas to consider prior to 2016. Following are some of the tax strategies that you can use right now, given the current tax situation.


Sell any investments on which you have a gain or loss this year. Harvesting losses against any capital gains is a great way to reduce the tax bite on security transactions. Losses that exceed capital gains can be used to reduce ordinary income at the rate of $3,000 per year (if filing jointly, $1,500 if married and filing separately), indefinitely. Meaning if you take $9,000 in losses this year with no capital gains to offset it against, you can reduce your ordinary income tax by $3,000 over three years. As a general rule, if you have a large capital gain this year, consider selling an investment on which you have an accumulated loss.

After selling security investments to generate a capital loss, you can repurchase them after 30 days. This is known as the "Wash Sale Rule." If you buy it back within 30 days, the loss will be disallowed. If you want similar exposure to what was sold, you can immediately repurchase a similar (but not the same) investment, e.g., an ETF or another mutual fund with the same objectives as the one you sold. If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free, your original investment is restored, and you have a higher cost basis for your new position.

If you anticipate an increase in taxable income in 2016 and are expecting a bonus at year-end, try to get it before December 31. This would help keep your 2016 ordinary income in check. Prepay deductible expenses such as charitable contributions and medical expenses this year using a credit card. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid.

For example, if you charge a medical expense in December but pay the bill in January, assuming it's an eligible medical expense, it can be taken as a deduction on your 2015 tax return.


If your company grants stock options, you may want to exercise the option or sell stock acquired by exercising an option this year if you think your tax bracket will be higher in 2016. Exercising an option is often but not always a taxable event; sale of the stock is almost always a taxable event.

If you're self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December. Accelerating income into 2015 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year or whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare Tax or Net Investment Income Tax (NIIT). In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2015, depending on your situation.

Other benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest. Taxpayers close to threshold amounts for the NIIT (3.8% of net investment income) should pay close attention to "one-time" income spikes such as those associated with Roth conversions, sale of a home or other large assets that may be subject to tax.

Here are some examples of what a taxpayer might do to accelerate deductions. Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax. Pay your entire property tax bill, including installments due in year 2016, by year-end. This does not apply to mortgage escrow accounts.

It may be beneficial to pay 2016 tuition in 2015 to take full advantage of the American Opportunity Tax Credit, an above-the-line deduction worth up to $2,500 per student to cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.

Try to bunch "threshold" expenses, such as medical and dental expenses (10% of AGI, 7.5% for individuals and their spouses age 65 and older), and miscellaneous itemized deductions. For example, you might pay medical bills, dues and subscriptions in whichever year they would do you the most tax good.

Threshold expenses are deductible only to the extent they exceed a certain percentage of AGI. By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.

The NIIT (net investment income tax, which went into effect in 2013) is a 3.8% tax that is applied to investment income such as long-term capital gains for earners above certain threshold amounts ($200,000 for single filers and $250,000 for married taxpayers filing jointly). Short-term capital gains are subject to ordinary income tax rates as well as the 3.8% NIIT. This information is something to think about as you plan your long-term investments. Business income is not considered subject to the NIIT, provided the individual business owner materially participates in the business.

Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay. For example, if you invest $20,000 in a mutual fund at the end of 2015 and you opt for automatic reinvestment of dividends, you must pay tax on the dividends. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund's distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as "ordinary dividends" that don't qualify for relief. Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. To find out a fund's ex-dividend date, call the fund directly.


The protection of your hard-earned wealth comes in the form of property & casualty, health, long-term care and life insurance, to name but a few. These policies are commission-based products (meaning salespeople might sell vehicles regardless of whether they are in the best interest of the buyer), so it’s important to work with a trusted independent agent. Annual policy reviews will uncover any coverage gaps and pricing overages. There are a multitude of vehicles, so it's important to find the ones that give you the coverage you need for the right price.

If you haven't signed up for health insurance this year, do so now and avoid or reduce any penalty you might be subject to. Depending on your income, you may be able to claim the premium tax credit that reduces your premium payment or reduces your tax obligations, as long as you meet certain requirements. You can choose to get the credit immediately, or receive it as a refund when you file your taxes next spring. Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9% on their tax returns, but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2015 tax return next April. High-net-worth individuals should consider contributing to Roth IRAs and 401(k)s because distributions are not subject to the Medicare Tax.

Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills. In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the excess over 10% of AGI). For amounts withdrawn at age 65 or later, and not used for medical bills, the HSA functions much like an IRA. To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2015, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,250 for single coverage or $2,500 for a family.

Qualified Plan Contributions

Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don't already have one. It doesn't actually need to be funded until you pay your taxes, but allowable contributions will be deductible on this year's return. If you are an employee and your employer has a 401(k), contribute the maximum amount ($18,000 for 2015), plus an additional catch-up contribution of $6,000 if age 50 or over, assuming the plan allows this and income restrictions don't apply.

If you are employed, or self-employed with no retirement plan, you can make a deductible contribution of up to $5,500 a year to a traditional IRA (deduction is sometimes allowed even if you have a company-sponsored plan). Further, there is also an additional catch-up contribution of $1,000 if age 50 or over.


For eligible tax years (we still don’t know if this will be an option this year as Congress likes to wait until the 11th hour), individuals age 70½ or over can exclude up to $100,000 from gross income for donations paid directly to a qualified charity from their IRA. Some key points to consider include: the donation satisfies any IRA required minimum distributions for the year, the donation excluded from gross income isn’t deductible, donations from a SEP or SIMPLE IRA aren’t eligible, donations from a Roth IRA are eligible and married individuals filing a joint return may exclude up to $100,000 donated from each spouse’s own IRA ($200,000 total).

If you plan on making a contribution to a qualified charity, college or other not-for-profit organization, consider donating appreciated stock from your investment portfolio in lieu of cash. Most organizations will be happy to receive the stock, you can deduct the gift, and you avoid paying tax on the appreciation. The stock or other property donated must have been held for more than one year in order to deduct its value as a contribution; otherwise the deduction is limited to your basis on the asset.

As you can see, there are many moving parts to a properly designed wealth strategy, and the parts are rarely static. Taking the time to plan before year-end could help you avoid costly mistakes, and help protect and give you more control of your legacy. We often put so much emphasis on the return on our investments, but often neglect the return on our planning.

See Also: 7 Smart Ways to Lower Your Taxable Income

Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.

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