Tax strategies for the year ahead
December 5, 2016 3:58 PM
When preparing clients for the year ahead, past tax planning strategies may act as the best guides.
Over the last 12 months, we published dozens of stories with insight from both advisers and strategists that may act as useful tools in 2017. Some of these included guidelines for filing IRA beneficiary forms, converting IRAs with tax-deferred accounts and methods that may help reduce some of the tax burden that comes with divorce.
Click through the following slideshow for 15 tax tips from the last year to better navigate the landscape ahead.
Over the last 12 months, we published dozens of stories with insight from both advisers and strategists that may act as useful tools in 2017. Some of these included guidelines for filing IRA beneficiary forms, converting IRAs with tax-deferred accounts and methods that may help reduce some of the tax burden that comes with divorce.
Click through the following slideshow for 15 tax tips from the last year to better navigate the landscape ahead.
Protect the panicked investor
What is the best approach when dealing with nervous clients?
Consider putting those who panicked and sold during the financial crisis of 2008 into a more conservative portfolio, or one that will get them to wait for the next bear market, before taking a more aggressive strategy, writes Allan S. Roth, founder of the planning firm Wealth Logic in Colorado Springs, Colorado.
"That past behavior is the best indicator of what they will do during the next plunge," Roth writes.
Read more:6 things advisers can learn from clients' tax returns
Consider putting those who panicked and sold during the financial crisis of 2008 into a more conservative portfolio, or one that will get them to wait for the next bear market, before taking a more aggressive strategy, writes Allan S. Roth, founder of the planning firm Wealth Logic in Colorado Springs, Colorado.
"That past behavior is the best indicator of what they will do during the next plunge," Roth writes.
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Strategies for transferring a home
For clients planning on giving their home to their children, but still plan on staying, they may consider using a Qualified Personal Residence Trust, according to James Bertles, a managing director and principal of Tiedemann Wealth Management, who is based in Palm Beach, Florida. After they leave, the client can then transfer the home to their children or keep it in the trust for them, or even a spouse.
“It’s a great strategy for people who want to transfer ownership of their home in the future but at today’s value, reduced by the present value of his or her right to live in the house for the term of residency as set forth in the trust agreement,” Bertles says.
Read more:Gimme Shelter: Help clients leverage real estate's investment clout and tax advantages
“It’s a great strategy for people who want to transfer ownership of their home in the future but at today’s value, reduced by the present value of his or her right to live in the house for the term of residency as set forth in the trust agreement,” Bertles says.
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Michael Nagle/Bloomberg
Planning through the rearview mirror
When preparing your clients' year-end tax strategies, be sure to review the previous year of new opportunities and restrictions that were implemented during the last year, while keeping an eye on how you can help your client.
Click below for a look at how the Protecting Americans from Tax Hikes Act of 2015, or PATH Act, provided new opportunities for clients in 2016 as an example.
Read more:Year-end tax planning through the rearview mirror
Click below for a look at how the Protecting Americans from Tax Hikes Act of 2015, or PATH Act, provided new opportunities for clients in 2016 as an example.
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Andrew Harrer/Bloomberg News
Protect your plane and avoid the IRS wealth squad
For advisers with ultrawealthy clients, it is critical that they keep a close look at their tax structure and Learjet logs for possible scrutiny from the IRS audit squad.
The elite team of regulators are always interested in aircraft and whether it is "being adjusted for correctly," noted Rosalind Sutch, a CPA at Philadelphia-based Drucker & Scaccetti. "There are ways of accounting for personal use whether you're an employee or not."
Read more:You do not want to be on the radar of the IRS wealth squad
The elite team of regulators are always interested in aircraft and whether it is "being adjusted for correctly," noted Rosalind Sutch, a CPA at Philadelphia-based Drucker & Scaccetti. "There are ways of accounting for personal use whether you're an employee or not."
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Inform the accountant
Sending individually tailored letters to clients' accountants directly is one way to develop a collaborative team with their specialists, writes Carolyn McClanahan, the director of financial planning at Life Planning Partners in Jacksonville, Florida.
McClanahan adds that her firm informs the accountants the number of 1099s they should expect from a client to ensure nothing accidentally goes unnoticed.
Read more:Improving real returns: Deep dive tax planning
McClanahan adds that her firm informs the accountants the number of 1099s they should expect from a client to ensure nothing accidentally goes unnoticed.
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Andrew Harrer/Bloomberg News
'A trustee-to trustee transfer'
Clients facing a community property claim to their IRA in a divorce should consider seeking a court order for a transfer incident to the divorce, writes Ed Slott, a CPA in Rockville Centre, New York. That, he says, is often found in the marital separation agreement
"By doing a trustee-to trustee transfer, the amounts awarded as a community property interest in a divorce can be moved from one spouse's IRA to the others without negative tax consequences," Slott adds.
Read more:Community property tax traps
"By doing a trustee-to trustee transfer, the amounts awarded as a community property interest in a divorce can be moved from one spouse's IRA to the others without negative tax consequences," Slott adds.
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Minimizing the tax bite of a bypass trust
When considering the steep rise in federal estate tax exemption over the last 15 years — from $1 million in 2001 to $5.45 million today — advisers should deliberately make income distributions from a bypass trust to the beneficiary, according to Michael Kitces, a partner and director of wealth management for Pinnacle Advisory Group in Columbia, Maryland.
"Because the bypass trust is a separate, standalone entity from the surviving spouse and other beneficiaries for estate tax purposes, it gets treated as a separate income-tax–paying entity as well," he writes.
Read more:Kitces: Minimizing the tax bite of a bypass trust
"Because the bypass trust is a separate, standalone entity from the surviving spouse and other beneficiaries for estate tax purposes, it gets treated as a separate income-tax–paying entity as well," he writes.
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A tax-efficient retirement draw-down strategy
Rather than the conventional approach of liquidating taxable investment accounts ahead of tax-deferred accounts — which are allowed to continue to compound — advisers should consider tapping their IRA accounts earlier rather than later, Kitces writes.
Advisers can achieve this goal by "funding retirement spending from taxable investment accounts — while also doing systematic partial Roth conversions of the pre-tax IRA to fill tax brackets in the early years," he adds.
Read more:Kitces: Tax-efficient retirement draw-down strategies
Advisers can achieve this goal by "funding retirement spending from taxable investment accounts — while also doing systematic partial Roth conversions of the pre-tax IRA to fill tax brackets in the early years," he adds.
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Andrew Harrer/Bloomberg
Donate to an IRS-approved public charity
To receive a tax deduction when giving collectibles as family heirlooms, clients must donate the items to an IRS-approved public charity, says Robert Pagliarini, president of Pacifica Wealth Advisors in Mission Viejo, California.
"You'll only be able to deduct the basis — how much you spent in materials creating it — rather than the fair market value," Pagliarini notes.
Read more:Smart tax strategies for donating collectibles
"You'll only be able to deduct the basis — how much you spent in materials creating it — rather than the fair market value," Pagliarini notes.
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File IRA beneficiary forms with extra care
Be vigilant when preparing a client's IRA beneficiary forms, Slott writes.
Slott reviews the consequences one adviser faced after erroneously changing a beneficiary from a look-through trust, which qualified as a designated beneficiary, to the estate, which does not. Although the adviser received a court order to approve a retroactive fix to the error, the IRS denied the requests and said that because there was no designated beneficiary, the inherited IRA must be paid over the client's remaining life expectancy.
Read more: Avoid this disastrous IRA blunder
Slott reviews the consequences one adviser faced after erroneously changing a beneficiary from a look-through trust, which qualified as a designated beneficiary, to the estate, which does not. Although the adviser received a court order to approve a retroactive fix to the error, the IRS denied the requests and said that because there was no designated beneficiary, the inherited IRA must be paid over the client's remaining life expectancy.
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Andrew Harrer/Bloomberg News
When tax-loss harvesting is best
Millennials and younger investors should be your only clients in lower tax brackets that are tax loss harvesting, according to Alex Benke, vice president for financial advice and planning at Betterment.
“If you’re young and earning less than you will be in the future, you do get to take up to $1,500 per year [$3,000 per couple] in losses and deduct that from your income," Benke said.
Read more:When tax-loss harvesting isn’t the best idea
“If you’re young and earning less than you will be in the future, you do get to take up to $1,500 per year [$3,000 per couple] in losses and deduct that from your income," Benke said.
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Converting IRAs with tax-deferred accounts
One way to help clients face big RMDs is by strategically converting their savings from a traditional IRA into a Roth IRA, which is funded with after-tax money, suggests Kevin Reardon of Shakespeare Wealth Management in Pewaukee, Wisconsin. That's because he says those required distributions can push clients into a higher tax bracket.
Reardon often converts chunks of his clients' regular IRAs into Roth IRAs at some point after they turn 59½, when the client can use tax-deferred accounts without penalty, but before 70½ when they are required to do so, he said. Advisers must also consider the chances of a higher tax bracket when starting to take distributions and other income streams begin to flow in.
Read more:It’s time for boomer clients to spend — and pay taxes on — their 401(k)
Reardon often converts chunks of his clients' regular IRAs into Roth IRAs at some point after they turn 59½, when the client can use tax-deferred accounts without penalty, but before 70½ when they are required to do so, he said. Advisers must also consider the chances of a higher tax bracket when starting to take distributions and other income streams begin to flow in.
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MIKE MERGEN/BLOOMBERG NEWS
How to make divorce less taxing
Divorcing couples who are still married on Dec. 31 are legally married for the next year. When considering filing jointly, married or as single and/or head of household, Justin Miller, a national wealth strategist at BNY Mellon in San Francisco, says timing can make all the difference.
"At $450,000 a year, you’re in the highest tax bracket for a single person but not if you’re married,” Miller said. “In this situation, being married is a tax benefit, so maybe we push the divorce into the following year.”
For individuals earning $250,000 or less a year, it is "probably better to get the divorce done this year," and file separately, unless one spouse has a lot of medical expenses, he said.
Read more:8 ways to make divorce less taxing
"At $450,000 a year, you’re in the highest tax bracket for a single person but not if you’re married,” Miller said. “In this situation, being married is a tax benefit, so maybe we push the divorce into the following year.”
For individuals earning $250,000 or less a year, it is "probably better to get the divorce done this year," and file separately, unless one spouse has a lot of medical expenses, he said.
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Minimize the pain of a residency audit
While residency audits often follow clients' attempts to move and stop their status as tax-paying residents from their former homes, additional measures must be taken to sidestep often invasive tax auditors.
“You have to pass the smell test,” said Sheryl Rowling, an adviser and CPA in San Diego. "What matters is how your family members and friends perceive your residency."
Shomari Hearn, an adviser and CFP with Palisades Hudson Financial Group in Fort Lauderdale, Florida, goes even farther, suggesting clients may even contemplate moving their valuable items — such as works of art — to their new state as soon as possible.
Read more:Help clients avoid the horrors of a residency audit
“You have to pass the smell test,” said Sheryl Rowling, an adviser and CPA in San Diego. "What matters is how your family members and friends perceive your residency."
Shomari Hearn, an adviser and CFP with Palisades Hudson Financial Group in Fort Lauderdale, Florida, goes even farther, suggesting clients may even contemplate moving their valuable items — such as works of art — to their new state as soon as possible.
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Daniel Acker/Bloomberg News
Create multiple tax pools for retirement savers
One way advisers can help clients lower their adjusted gross income during retirement is by creating more tax-free and tax-deferred pools of capital for them to draw from, according to Roger S. Stinnett, managing director of wealth planning at First Foundation Advisors in Irvine, California.
Keeping multiple pools of capital with varying tax characteristics provides the client flexibility to draw from each pool at different times and in different amounts, minimizing their adjusted gross income during retirement, notes.
Read more:Help clients with pre-retirement tax planning
Keeping multiple pools of capital with varying tax characteristics provides the client flexibility to draw from each pool at different times and in different amounts, minimizing their adjusted gross income during retirement, notes.
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