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3 Mid-Year Strategies to Reduce Your 2016 Tax Bite

Combining planning with strategy for a successful business goal

Optimizing your tax efficiency requires the collaboration of your advisors and a significant chunk of time to plan and implement. So it makes sense to get a mid-year start on certain tax projects.

1. Be sure you’re on track for maximizing pre-tax contributions

Your employer-sponsored retirement plan is far and away the most advantageous place for you to save for retirement, especially if it offers a company matching program. Any company match that you receive can appropriately be called free money: it is a guaranteed return on your investment. At a minimum, be sure that you are contributing enough from your paycheck to get the full company match. Far better is to make the maximum allowable contribution each year.

The contributions that you make to your plan also lower your taxable income for the year (dollar for dollar), and your investment gains grow tax-free.

Any company match that you receive can appropriately be called free money: it is a guaranteed return on your investment.

Some numbers

• Many employers offer a match of up to 6% of an employee’s gross earnings per year.

• Some companies match employees’ contributions on a percentage basis (e.g., 50 cents on each dollar contributed, up to a limit).

• In 2016, the maximum allowable contribution to your 401k or 403b is $18,000 if you are younger than 50, and $24,000 if you are 50 or older.

•Employer contributions don’t count toward your annual 401k contribution limit.

Some limitations

• Some employers offer no company match.

• Employer plans have limited investment options.

• Your investment returns will be affected by plan fees and expenses.

What if your employer doesn’t offer a match?

If your employer doesn’t offer a match, talk to your financial advisor. Although contribution limits for Traditional and Roth IRAs are much lower, these accounts are still powerful vehicles for retirement saving.

Your financial advisor can help you understand how your level of income and tax bracket impact upfront deduction benefits (for traditional IRAs) and whether you are eligible to make Roth IRA contributions.

More importantly your advisor can help you optimally sequence your retirement savings between traditional IRAs, Roths and non-matching employer plans.

2. Gift appreciated assets

Gifts to charity

Instead of giving cash to your favorite charity, give appreciated stock. As long as you’ve held it for more than a year, you’ll be eligible to receive a tax deduction for the full value of the stock at the time of the gift, and you’ll avoid capital gains tax on the stock. Note that, for large gifts, and for gifts of assets other than public securities, rules on deductibility are more complex.

Gifts to family members

Almost all parents help their children financially by some method. If you are looking for an added tax benefit to helping your children, and your adult children have lower incomes, it’s possible to shift capital gains to their lower tax bracket by gifting appreciated assets. Almost all parents help their children financially by some method. If you are looking for an added tax benefit to helping your children, and your adult children have lower incomes, it’s possible to shift capital gains to their lower tax bracket by gifting appreciated assets.

The transfer of appreciated assets to children is a good strategy if your children are prepared to use them to pay for current expenses. Otherwise, it may be better to leave the assets in your estate plan, since your heirs will receive the step-up in cost basis when they inherit, thus avoiding any tax on the growth of the assets received. Almost all parents help their children financially by some method. If you are looking for an added tax benefit to helping your children, and your adult children have lower incomes, it’s possible to shift capital gains to their lower tax bracket by gifting appreciated assets.

It’s also important to be sure that a potential giftee is not subject to the “kiddie tax.”

Some 2016 numbers

• Single filers with incomes below $37,650 and married filing jointly filers with incomes below $75,300 qualify for 0% federal capital gains tax.

• 24: the age at which a child who is a full-time student is no longer subject to the kiddie tax (i.e., their parent’s tax rate).

• $14,000: the maximum amount you can gift to anyone without having to file a gift tax return. You can give this amount to as many individuals as you’d like.

• For example, a husband and wife can each gift $14,000 to a child and to that child’s spouse, for a total of $56,000.

3. Understand Your Required Minimum Distribution (RMD)

2016 is the year when the first Baby Boomers will need to deal with Required Minimum Distributions, or RMDs. There are many rules—you should always consult with your financial advisor on this topic as well—but being aware of some of the basic features of RMDs can help you avoid costly mistakes and optimize your tax advantage.

RMDs apply to traditional IRAs, IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs, all employer-sponsored retirement plans, including profit-sharing plans, 401ks, 403bs and 457b plans, and Roth 401k accounts. The RMD does not apply to Roth IRAs while the owner is still alive.

Planning Ahead

A significant RMD could push you into a higher tax bracket, causing a ripple effect in other areas of your finances. By planning ahead with your advisor and, for instance, converting traditional IRA assets to Roth IRA assets over several years, you might be able to reduce the amount you are required to withdraw.

Timing

In the first year you’re required to take your RMD, you’re allowed a grace period from the ever-after December 31st deadline. You can defer your first RMD until April 1st of the following year. But by doing so you will need to take two RMDs in one calendar year—a move that could push you into a higher tax bracket.

The main benefit to putting dollars into an IRA in the first place is tax-deferred growth, so for many people it’s best to take the RMD as late into the year as possible, to extend that advantage as long as possible. Your RMD, like any distributions from a traditional IRA, are taxed as ordinary income at your personal federal income tax rate, and state taxes may also apply.

If you’re still employed, you generally do not need to take an RMD from your current employer-sponsored retirement plan, but you do need to take your RMD from any IRA or previous employer’s plan once you reach 70½.

Usage

If you don’t need your RMD for living expenses, you can transfer those dollars into a taxable account and let them continue to work for you. If you do need your RMD for cash flow, you can break it up into quarterly or monthly distributions throughout the year. You can always take more than the minimum from you IRA if you’d like.

The law that allows you to donate up to $100,000 from your IRA to a qualified charity (a Qualified Charitable Distribution, or QCD) was recently made permanent. Donated distributions do not count as taxable income and can be used to satisfy your RMD. If you make your donation in the form of appreciated assets, there is an additional benefit:

When you donate an appreciated IRA asset that you’ve owned for more than a year to a qualified charity, it does not count as taxable income, and you can deduct the full market value of the asset, not just what you paid for it.

RMD numbers and dates

• The year you turn 70½ is the first year for which you are required to take a minimum distribution from your traditional IRA.

• April 1st: for your very first RMD only, you can defer your required distribution until April 1st of the following year. (But this means you’ll have to take two RMDs in one year, and could push you into a higher tax bracket in that year.)

• December 31st is the deadline for making for all RMDs after the first one you are required to take.

• Year-end market value: the value of your IRA on the last day of the year is used to calculate each year’s RMD.

• Divisor: the year-end value of your IRA is divided by a life expectancy factor provided by the IRS in Publication 590-B.

Consult your advisors

Whenever you consider any of these strategies, it’s important to review potential complexities with your financial advisor, accountant and estate planning attorney. The advisors at TGS Financial welcome the opportunity to get the conversation.

TGS Financial Advisors does not provide tax advice. All decisions regarding the tax implications of your investments should be made in connection with your independent tax advisor.


By Joan Hill / Communications Coordinator

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