It’s a privilege to be able to introduce myself in this month’s Tax Planning newsletter. My name is Seton McAndrews and I am joining the ever growing WrapManager as a Senior Wealth Strategist. Getting to know many of you and becoming a familiar voice are my main priorities, so don’t be surprised if you get a call in the near future. I can promise you that I will maintain the high level of service and financial advice that you have come to expect from WrapManager, and strive to improve the experience that you have with our firm.
We all know tax planning is incredibly important and something many of us should have done yesterday. Doing so can help reduce the tax burden to you and your heirs. It can be a bit overwhelming so we’ve focused on a few key topics that you should discuss with your financial advisor now.
Discuss These Topics with Your Financial Advisor
If you are looking for a financial advisor or yours does not offer the following services, we’re here to help! WrapManager helps clients see and understand their financial situation, meet their goals, and suggests customized portfolios using who we believe are some of the best money managers in the world.
Consider Roth IRA Conversions for Your Tax-Deferred Retirement Accounts
Effective January 1, 2010, the income restrictions have been permanently removed for Roth conversions. The government has also provided incentives to convert during 2010, making it a potentially great year to do so. You can count the entire conversion amount as taxable income in 2010 or split the amount 50/50 and count each portion as taxable income in 2011 and 2012. (You must choose only one option). For example, if you convert 500K of your traditional IRA, you can count 500K as taxable income in 2010, or count 250K towards your taxable income in 2011 and 250K in 2012. The amounts will be taxed at your income tax rate for that year. Any conversion that takes place after 2010 will be counted as income in the year of the conversion. Be sure to request our 2010 Roth Conversion Guide to learn more about how converting can help you. Conversions may be most appropriate for individuals who:
- Are able to pay the conversion taxes from an outside source
- Will be passing the assets to heirs
- Will not need the converted amount for retirement income
- Expect their future retirement income tax bracket to be higher than their current tax bracket
- Expect their estate tax will be higher than their future income tax bracket
Make Sure Your Beneficiaries are Up To Date
At the owner’s passing, the assets of IRAs and other qualified plans are distributed to beneficiaries designated by the owner of the plan, not according to provisions in a will. Reviewing beneficiary designations will ensure they are current and consistent with your estate plan. Click here to contact your Wealth Advocate to review your beneficiaries.
Move Your Income Producing Strategies
Allocating investments taxed at lower capital gains and dividend rates to taxable accounts, and those with higher tax rates to tax-deferred accounts may be beneficial. We think dividend paying stocks are going to do well in the future as people look for investments where they are ‘paid to wait’. This strategy usually benefits from a slow but growing economy and is not as sensitive to interest rate fluctuations. We recommend Federated Investors Strategic Value strategy, which specializes in dividend paying stocks, with a dividend yield of 5.18% as of August 31, 2010. Click here to request more information on Federated Investors from one of our Wealth Strategists.
Estate and Dividend Tax Rates
The Estate Tax could go back to 55% for estates over $1 million (currently no estate tax in 2010). Dividend income taxes could also increase from the current 15% to 20% or even to your ordinary income tax rate.
Review Capital Gains versus Losses
Recognizing your long-term capital gains at 2010 rates may provide an advantage if capital gains rates rise in future years. If they do increase, it may be advantageous to defer recognizing losses in future tax years. This will help to more effectively reduce your capital gain exposures or to offset income. Investors typically realize the losses before year-end, but it may be beneficial to wait. Losses can be used, dollar for dollar, to offset realized gains (including stock sales and mutual fund distributions). Excess losses can be used to offset up to $3,000 of earned income. Any unused losses, in excess of the $3,000 annual limit, can be carried forward indefinitely.
Plan Now to Avoid Alternative Minimum Tax “Triggers”
More and more investors are finding themselves subject to the Alternative Minimum Tax (AMT). Working with a tax professional to do preliminary AMT calculations before the tax year ends is one of the best ways to determine potential AMT liability. Some of the most common AMT triggers include:
- Exercise of incentive stock options and large long-term capital gains
- Exemptions
- State and local taxes
- Miscellaneous itemized deductions
Gifting Strategies
A charitable contribution could provide a greater tax benefit if taxes are higher. Waiting to make the contribution until next year could save you money. Gifting your low cost basis securities is beneficial as you are getting rid of a higher tax liability compared to securities with a higher cost basis. This benefit increases if capital gains tax rates go up. Below we review a few ways to take advantage of gifting.
Family Gifting
Gifting to Reduce Your Taxable Estate
In 2010, you can make gifts up to $13,000 per recipient per year, exempt from gift taxes. If you’re married, you can effectively give gifts of $26,000 per recipient per year, without exceeding the annual exclusion, by utilizing gift splitting. In addition, 529 plans can be super-funded every five years by depositing a $65,000 lump sum for individuals, or up to $130,000 if a married couple sets up the plan.
Annual Gifting and the Lower Capital Gains Rate
You may have considered gifting appreciated assets to children and grandchildren to take advantage of the potential lower capital gains rates when these assets are sold (the donor’s cost basis is transferred with the stock). The age limit at which children are subject to the “kiddie tax” is 19 (or full-time students up to age 24) in 2010. Those who may be in the two lowest brackets - 10% and 15% - and subject to the 0% capital gains rate in 2010 may be appropriate recipients. Children subject to the “kiddie tax” (who may pay tax at their parents’ highest marginal rate in future years) may be less appropriate recipients.
Pay Certain Expenses Directly
Unlimited payments for qualified medical and educational purposes can be made without generating gift tax, which may help you accelerate your gifting strategies. These gifts must be made directly to the respective medical or educational institution to qualify for exclusion.
Charitable Gifting
The general limitations for public charities are: 50% of adjusted gross income (AGI) for cash gifts, 50% of AGI for gifts of ordinary income property, and 30% of AGI for capital gain property. For private charities the general limitations are: 30% of AGI for cash gifts, 30% of AGI for ordinary income property, and 20% of AGI for gifts of property.
Consider Gifting Securities Instead of Cash
An alternative to donating cash is gifting securities to charity, thereby avoiding capital gains taxes on the sale of the stocks. The gift (and charitable deduction) is valued at the fair market price of the stock on the gifting date. Higher capital gains tax rates could make it even more attractive to gift low basis assets to a charity.
Gift Securities That Show a Loss
Individuals who have securities valued below their basis may utilize these in charitable giving by selling them first to establish a tax loss and then donating the proceeds
Conclusion
The above ideas should always be carefully considered by you, your tax attorney, and one of our wealth advocates before implementing. While the benefits of each one may sound good, they may not be appropriate for you given your financial picture and objectives. Understanding your financial picture is critical in determining if the above strategies are good for you.
Give one of our Wealth Strategists a call today at (800) 541-7774 (or email
) to have us take a look at your financial situation and investments, discuss these tax strategies, or research money managers.
Source: http://www.irs.gov
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