The Skinny on Year-End Planning

Hard to believe we’re approaching the end of 2106, right?  Terms like year-end tax planning and loss harvesting get thrown around.  Here’s a look at some of the technical considerations for year-end planning.  They apply to taxable (non-retirement) accounts only and are often geared towards families with significant investable assets.

Take advantage of tax loss harvesting    

You can deduct up to $3,000 annually thru tax loss harvesting; any overall loss above this amount can be carried forward to future tax years.  Tax loss harvesting involves selling one position with a tax loss — where the value is less than the cost basis — and purchasing another position that will hopefully increase in value.  Be careful to avoid wash sale rules: you cannot purchase the same or substantially identical position within 30 days of the other position’s sale.

So what does substantially identical mean?  If trading individual stocks, make sure it is not the same company.  If you sell Dell at a loss and repurchase Apple in the same taxable account, you have successfully avoided wash sale rules although they are related industries.  If, however, you sell Monsanto stock in a taxable account and immediately repurchase Monsanto stock in an IRA, you will trigger wash sale rules.  Bottom line?  If it is the same stock, you cannot repurchase it within the 30 day window — even in a different account.

Moving beyond stocks, you could sell a large cap blend Exchange Traded Fund (“ETF”) such as Vanguard’s Total Stock Market ETF (ticker VTI) at a loss and immediately repurchase a large cap growth mutual fund like Vanguard Growth Index Fund (ticker VIGAX) without running afoul of the wash sale rules.  If you are strictly buying and selling ETFs, I suggest shifting into a different asset class.  For instance, invest the proceeds of a domestic mid-cap ETF into an international or domestic large cap ETF.

Consider creative charitable giving strategies

Most people will make year-end cash gifts to charitable organizations.  But if you intend to give over $1,000 to a particular charity, consider gifting appreciated stock instead.  Appreciated means it has a significant value above the cost basis — the price at which you purchased or inherited the position.  The stock must come from a taxable, non-retirement account.  Contact the charitable organization to ensure they accept the position, and avoid capital gains tax by sending it directly to the charity.

Another option is a Donor Advised Fund (DAF), whereby you get an immediate tax deduction in the current tax year even if your proposed grants are pushed into a later tax year.  Fidelity and Schwab are known leaders for Donor Advised Funds, but minimum account sizes apply (i.e. $5,000).  

Pre-fund education costs

Do you want to start saving for your children or grandchildren’s education costs?  There are two separate guidelines for 529 Education plan contributions and gift tax rules.  Gift tax regulations allow you to gift up to $14,000 to a single beneficiary, and your spouse (if you are married) can gift up to $14,000 to the same beneficiary.  Combined, the two of you can gift up to $28,000 to one person in 2016.  

529 Plans have a special “superfunding” gift tax rule whereby you can make five years worth of contributions in a single tax year.  Each state has its own guidelines on the maximum 529 account value and state income tax deductions for 529 plan contributions, so read the fine print.

If you want additional guidance on year-end planning strategies, please contact me.

Forever Faithful,

Deb Meyer, CPA, CFP(R)