'Tis the Season: Year-end Tax Planning Strategies

As we approach year-end, we work with clients and their tax and legal advisors to identify and execute tax minimization opportunities. Below we briefly describe a number of the opportunities that are available through the end of the year.

Investment portfolio

The volatility in equity markets during 2011 provided a number of opportunities to harvest capital losses in some client portfolios, particularly where money had been invested in the last year. We will continue to look for additional tax loss harvesting opportunities before year-end, although, happily, the strong gains in October have made capital losses scarce. In addition, there are a number of other tax minimization opportunities that may be appropriate for you or your family.

  • Retirement plans for the self-employed. If you have self-employment earnings - for example, from consulting services or corporate boards – you are eligible to contribute to your own retirement plan. Most of these plans must be established by December 31, so let us know if you have any self-employment earnings that we haven’t already discussed.
  • Catch-up 401(k) contributions. Individuals age 50 and older are eligible to make an additional $5,500 of “catch- up” contributions (on top of the $16,500 standard contribution) to a 401(k) plan. A recent paystub will show your total 2011 contributions, and if it’s below $22,000, you’ll want to increase contributions through year-end by filing paperwork with your HR department or 401(k) plan administrator.
  • IRA and Roth IRA contributions. You have until April 15, 2012 to make $5,000 contributions ($6,000 if 50 or older) to IRAs and Roth IRAs. There are income limitations that disqualify many Aspiriant clients from contributing to IRA and Roth IRA accounts, but many clients’ children are eligible if they’ve earned employment income during the year.
  • Roth conversions. Regardless of your income level, you can convert your traditional IRAs to Roth IRAs. Doing so requires paying income tax on the conversion amount, but future earnings and distributions are entirely tax-free. You can unwind a 2011 conversion anytime before October 15, 2012, giving you a “free look” period. We can help you determine if a Roth conversion makes sense given your unique income, spending and estate planning objectives.
  • Side-stepping capital gain distributions. Many mutual funds distribute taxable capital gains at year-end. We monitor estimated capital gain and dividend distributions and, if appropriate, will sell a fund to avoid realizing the gain.

Income taxes

With no sweeping tax legislation being debated by Congress this year, most clients have fewer legislative unknowns to complicate year-end planning. As a result, the traditional tools for deferring income into the following year and accelerating deductions into the current year (e.g., property and state income taxes, charitable gifts) will address the needs of most clients. This article introduces a few other strategies that you may not have considered before.

  • Required minimum distributions. If you are over 70 1⁄2, you are required to take minimum distributions from your retirement accounts by December 31. Aspiriant calculates and distributes the necessary amount during the fourth quarter.
  • Distributing IRA to charity. Clients over 70 1⁄2 have an opportunity to make charitable gifts up to $100,000 directly from an IRA to a public charity (not a donor advised fund or private foundation). The donation is considered part of your required minimum distribution and, while you aren’t able to deduct the charitable gift on your individual income tax return, you aren’t required to report the distribution as income either.
  • Increasing income tax withholding to avoid penalties. Clients who have underpaid their estimated taxes for any of the first three quarters of the year may be subject to underpayment penalties. This is generally more of an issue for clients who derive most of their income from self- employment activities (e.g., consulting, boards), where income taxes are not withheld. Because the IRS treats withheld taxes as having been paid ratably through the year, clients could cure the shortfalls by increasing tax withholding before year-end. In addition to increasing the withholding rate on salary or bonus compensation, clients over age 59 1⁄2 could withhold taxes on distributions from a retirement plan or IRA to meet their withholding target.
  • Purchase qualified small business stock (QSBS) before the end of 2011. Clients who invest in small, private companies may well have stock that qualifies as QSBS. Clients who sold QSBS during 2011 can defer taxation if certain conditions are met.
  • Non-business energy property credit. The credit, equal to 10% of the amount paid for qualified energy efficiency improvements, will apply only to qualified energy efficiency improvements installed in the taxpayer’s principal residence and placed in service before January 1, 2012.

Wealth transfer planning

For the first time in several years, the estate tax rules are not changing between 2011 and 2012. The current estate tax rules, established in December, 2010, do not expire until the end of 2012 and therefore there are few critical year-end gift and estate tax planning considerations this year. Next year, however, may be a very busy year-end since, absent any new estate tax legislation, all the current favorable rules terminate, including the increase in the lifetime gift tax exemption to $5 million. We’ll discuss the implications of this for your personal estate and gift planning throughout 2012.

In the meantime, any person can make gifts of up to $13,000 to anyone each year. This is a “use it or lose it” opportunity, so clients who are likely to have a taxable estate can substantially reduce their future estate tax liability by maximizing their annual exclusion gifts to family, friends or anyone else whom they’d like to benefit. Gifts can be made outright, to a 529 College Savings Plan for children or grandchildren, or to a special type of irrevocable trust.

Young Kim, Clay Stevens, Ray Edwards


Circular 230 Disclosure:
To assure compliance with Treasury Department rules governing tax practice, the Treasury Department now requires that all tax advisors attach the following statement to any and all written communication, except to the extent exhaustive steps are taken to satisfy the new guidelines of the regulation. We hereby inform you that any advice contained herein (including in any attachment) (1) was not written or intended to be used, and cannot be used, by you or any taxpayer for the purpose of avoiding any penalties that may be imposed on you or any taxpayer and (2) may not be used or referred

Past performance is not indicative of future results. All investments may lose value. Indexes are unmanaged and may not be directly invested in.