2014 Year-End Tax Planning is Upon Us!
December 2014

On behalf of the Beacon Pointe family, we wish you the best during this holiday season and thank you for your continued loyalty and support.   Year-end is also the time to focus on tax moves that might improve your current or future tax situation.  While Congress didn’t pass any significant tax legislation impacting investors in 2014, everyone is still adjusting to higher taxes brought on by The American Taxpayer Relief Act of 2012 (ATRA) and looking for ways to reduce the tax bite.  Here are a few portfolio related moves to consider with your accountant and advisor.

Convert Your Traditional IRA to a Roth IRA.

If you believe your tax rate in retirement might be higher because of greater expected income in your retirement years or that tax rates will continue to rise, you should consider converting your traditional IRA to a Roth IRA.  A Roth IRA is attractive to those expecting higher taxes in retirement because unlike distributions from a Traditional IRA, qualified withdrawals from a Roth IRA are considered tax free income.  There’s no free lunch of course, as you’ll have to pay income tax on the amount you convert.  Nevertheless, the conversion typically makes sense if: (1) you have monies outside of your IRA to pay the income tax on conversion, (2) you believe you will not be in a lower income tax bracket in your retirement years and (3) you have more than a decade before you’ll need to use the funds to allow for tax-free compounding, or (4) you plan on leaving your IRA to your heirs.   A conversion might also save you from paying more tax over time if not having to take RMDs from the converted account reduces your income once you must take RMDs below the threshold, triggering the additional 3.8% Medicare surtax on your net investment income.  You reach that threshold when your Modified Adjusted Gross Income (“MAGI”) falls above $200,000 if single or $250,000 if married and filing jointly.  Note that if you decide to convert to a Roth, you have the opportunity to change your mind, as you have until October 15th of next year to recharacterize the Roth IRA back to a Traditional IRA.

Maximize Your IRA and Retirement Plan Contributions. 

Tax-deferred growth results in faster growth of your retirement funds, yet many people fail to fully fund their retirement plans.   Be sure to fund your retirement account to the applicable limit:   the IRA funding limits for 2014 are $5,500 ($6,500 if over age 50) and the elective deferral limits to 401(k), 403(b), and 457 plans are $17,500 ($23,000 if over age 50).  If you are a high income taxpayer, deferring income might be particularly important if it brings your income below the thresholds that subject you to the top income and capital gains tax rates or limitations on personal exemptions and itemized deductions.

Gift Appreciated Securities to Charity.

If you are planning to donate to charity this year, consider making your donation with appreciated stock or mutual funds you have held for more than one year rather than cash.  Given the multi-year bull market run, it’s a good move considering that if you itemize your deductions not only would you be able to deduct the full fair market value of the securities (subject to the 30% Adjusted Gross Income (“AGI”) deduction limit with overage carried over for 5 years) you also avoid the capital gains tax you would otherwise pay on the sale of those securities. Just be sure to discuss your charitable intentions with your accountant, as your deduction for all itemized deductions, including charitable gifts, might be reduced by up to 3% in years your AGI exceeds $254,200 ($305,050 married filing jointly).  It might make sense to make such contributions in lower income years. If it’s wise from a tax standpoint to make your charitable deduction in 2014 but you don’t necessarily want all of the donations to go to charity this year, consider making your donation to a donor-advised charitable fund before year-end. You get the income tax deduction this year but direct the fund to make donations to your chosen charities over the course of many years.  Please let us know if you would like to gift securities, as it takes some time to facilitate the transfer of securities.

Satisfy Your Required Minimum Distributions and Consider a Direct Charitable Rollover.

If you’re over age 70 ½ and haven’t taken all your Required Minimum Distributions (“RMDs”) from your Traditional IRAs or other employer-sponsored plans, it’s time to take those distributions to avoid a 50% penalty on the amount you should have withdrawn before year-end.   If you choose to be charitable, you might consider transferring your remaining RMD (up to $100,000) directly to a qualifying public charity (not a private foundation, donor advised fund or support organization) to both satisfy your charitable goals and possibly prevent your RMD from being included in your income.  Talk to your accountant as Congress has not yet reinstated the Qualified Charitable Deduction (QCD), yet may do so at year-end as in years past.  If Congress reinstates the QCD, making a direct transfer from your IRA might lower your income and allow you to qualify for income tax breaks you would not otherwise receive if your RMD was instead included in income and you then made a deductible donation to charity.   If Congress fails to reinstate the QCD for 2014 the direct transfer to charity would be a taxable IRA distribution that would be included in your income, but if you itemize you would also get a charitable deduction for the transfer.   Be sure to get a receipt from the charity and a written acknowledgment from the charity describing the donation and anything you received in exchange for the donation for gifts over $250.

Make Annual Exclusion Gifts.

In 2013, Congress made permanent a generous exclusion that allows individuals to pass during life or death up to $5,000,000 (indexed for inflation) free of tax; yet, if you think you might transfer wealth to loved ones in excess of this amount, you should consider taking advantage of tax-free gifts using the annual exclusion.   The annual exclusion allows you to make annual tax-free transfers ($14,000 per spouse in 2014) in cash or property (such as securities) to anyone without reducing your ability to shield future wealth transfers from taxes using your gift and estate tax exclusion.  For example, if you have three children, you could gift each child up to $42,000, or you and your spouse could collectively give up to $84,000 to those three children without whittling away at your $5,340,000 transfer tax exclusion.

You can be creative in how you make annual exclusion gifts, including gifting to fund college or gifting to fund a loved one’s retirement.  If you gift to fund a tax-advantaged Section 529 college savings plan for a child or grandchild, you can even retain ownership of the account and access the funds for your own non-educational use later if needed (subject to penalties) while still removing the account from your estate.  If your child or grandchild is working and you would like to help them save for retirement, your annual gift of cash might fund a Roth IRA as your employed child/grandchild might fall under the income limitations that typically prevent you from contributing to a Roth IRA.  Specifically, in 2014 an employed child/grandchild can use $5,500 of your gift to fund a Roth IRA, reduced by any other contributions to an IRA.  Your child/grandchild must have earned at least $5,500 in 2014 and not more than $129,000 (single taxpayer) to be eligible for the contribution with a reduced contribution amount if he or she earned more than $114,000.   You would want to make the cash gift this year, but your child/grandchild has until April 15th of 2015 to open and fund the Roth IRA.

Harvest Losses from Your Taxable Accounts.

Selling securities for a loss (“harvesting” losses) can reduce your tax bill now and in the future.  Even if you’ve held the securities for less than a year, losses from the sale of securities can shelter capital gains realized this year from tax and any unused losses can reduce up to $3,000 of ordinary income.  You can carry any losses not used this year forward to cut your future tax bills.  Note, though, that you cannot deduct a loss on a security when a virtually identical one is purchased within 30 days of the original sale, as this is considered a wash sale. Please contact your advisor to discuss the specifics of your situation.

As always, Beacon Pointe is available to help you address any portfolio related tax concerns.  We will work directly with your managers and tax advisors regarding your specific situation.   Do not hesitate to call us with any questions or to discuss steps you would like taken in your portfolio.

All the best for the remainder of 2014! 


Shannon Eusey

President, Partner

Disclaimer: This has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. Beacon Pointe does not endorse and is not responsible for the content, product, or services of other third party sites or references. Beacon Pointe does not offer legal or tax advice.  Private legal counsel alone may be responsible and relied upon for these purposes. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE:  To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.

Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.

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