As the calendar year draws to a close, many of us consider what actions and decisions we should be considering with respect to our financial affairs. Holiday spending, year-end travel and the day-to-day expenses of living come to mind. We also tend to start pondering what is on the horizon for the upcoming year. This may include vacations, college education costs and any major purchases or maintenance items that may be needed for our homes.
Hopefully, some of this planning actually starts before the Black Friday and Cyber Monday shopping events, so we aren’t taken by surprise by any large expenditures on those holiday shopping events. This year, tax reform proposals may also impact some year-end planning and decisions.
The end of the year often is a time that many consider gifts to charitable organizations. Many charitable and nonprofit organizations depend on year-end giving to fund a significant portion of their annual operating budgets. This year likely is no exception. There may be some unique planning opportunities this year with respect to charitable giving. The discussion around tax reform and the possible enactment of lower marginal tax rates likely will have some considering the strategy of accelerating deductions in situations where marginal tax rates are expected to decline in the future.
The tax benefit of a charitable deduction in a higher marginal tax rate year generally is more beneficial than in a lower marginal tax rate year. However, if marginal tax rates are expected to increase, the opposite strategy often is considered (deferring deductions). With the recent tax reform discussions, there may be a number of individuals who fall into either situation. As more debate and actual tax legislation are considered in the coming weeks, many of us may have more clarity as to what the future may hold with marginal tax rates and our own individual tax situations.
Another opportunity with respect to charitable giving comes as the result of the increase in the equity markets over the past year. Many have seen our individual stock portfolio holdings significantly increase in value over the past 12 or so months. Gifts of appreciated public company shares held for more than one year can be given to qualified charities in lieu of cash.
One of the benefits of using appreciated public company shares held for more than one year is the appreciation is not taxed to the donor when a gift is made to a qualified charitable organization. For example, if the donor has shares in a public company worth $20,000 and a tax cost basis of $5,000 and the donor has held the shares for more than one year, the $15,000 of appreciation isn’t taxed to the donor and the donor has a charitable deduction for the fair market value of $20,000. The amount of the charitable deduction is subject to the specific IRS requirements and limitations and the proper reporting and disclosure in the donor’s tax return. Any charitable giving planning strategy requires the assistance of professional tax advisers.
Other opportunities for review of one’s tax and financial situation also can be contemplated as the year ends. The possible tax reform changes in marginal tax rates may impact some other personal financial planning decisions. This may include elective contributions to retirement accounts, such as a 401(k) account or a deductible individual retirement account (IRA). The change in marginal tax rates may impact some decisions on the amount to contribute to a qualified retirement account, though many don’t base their contributions solely on tax rates but consider their specific personal financial situations and their specific retirement plans and needs. Once again, seeking the advice of a professional adviser should be sought prior to making any changes in contribution elections for retirement accounts.
Also, with respect to retirement accounts, many of us have seen increases in the value of our accounts as a result of the recent equity market performance. The recent market performance of any holdings in the retirement accounts may be a good time to consider how the retirement funds are invested and/or allocated. Different strategies may apply for risk tolerance, investment returns, current age and one’s intended retirement age.
A combination of retirement planning and charitable planning may be available for older individuals. For those age 70½ and older, there is the qualified charitable contribution transfer from an IRA to charity. I won’t get into any significant detail as to its specifics, as we have discussed this opportunity in the past. However, I do want to raise this as a possible year-end strategy for those that qualify. Reviewing this strategy with one’s investment and tax advisers is recommended.
Another area for consideration as we approach year-end may include reviewing any education savings for children or grandchildren. This may include section 529 plans and other savings vehicles for higher education. The value in many of these accounts has been impacted by the recent favorable performance in the public equity markets.
Tax reform also may impact death planning. Whether the estate tax is eliminated or there are changes in the annual amounts for gifts to family members, any changes may impact decisions for future gifts and transfers of assets at death. As tax reform is finalized, a review of estate and gift planning strategies with professional advisers should be considered. This may include updating estate planning documents to take into account any tax or other legal changes.
With the planning items mentioned above, serious consideration and evaluation of any potential tax legislation that is enacted before year-end or is likely to be enacted in the new year must be undertaken. Any changes in federal income tax rates and the determination of taxable income and deductions may impact what planning and decisions, if any, to take in 2017 or a later year. Change always presents opportunities. The real challenge will be having a clear understanding of the actual or likely changes before making any significant financial decisions.
William Roth is a tax partner with the local office of international accounting firm BDO USA LLP. The views expressed above are the author’s and not necessarily those of BDO. The comments are general and not to be considered specific tax or accounting advice or relied upon for the purpose of avoiding penalties. Readers are urged to consult their professional advisers.