Tax planning is a year-round exercise but you can amplify your efforts as you close out the year.  If you want to help lower your clients’ tax bills, work together with them and their tax coordinator and aim to always do the right thing for your customers.  Clients often have a visceral reaction to tax savings, so you can add additional value to your relationship by bringing tax-smart ideas to the table.

Here are a few ideas that can get you started:

Almost everyone is in a lower tax bracket now

This might be a good time to consider doing a Roth conversion by December 31, 2019 and take advantage of the lower tax rates. Roth conversions don’t always carry a tax bill. Taxpayers can mitigate their tax bills by pairing tax strategies. For instance, a client could increase charitable deductions to match the amount of their Roth conversion. Remember there are no income limits for Roth conversions.

Review where your clients are with capital gains and losses

Mutual fund capital gain distributions typically are announced during the fourth quarter. After taking distributions into account, what should your client do, if anything? If your clients are in the 22% or higher tax bracket, tax-loss harvesting may make tax sense. Your client can harvest losses in excess of their gains, but are limited to taking $3,000 in losses in excess of gains annually. Losses not used in 2019 can be carried forward indefinitely for federal tax purposes.

There is a long-term capital gain tax rate of 0% in the two lowest (10% and 12%) marginal tax brackets. If you find clients with projected taxable income of less than $39,475 for single filers, or $78,950 for married filing jointly, they may want to recognize long gains, which could be taxed at a 0% federal tax rate. Tax-gain harvesting can be a tax-smart idea. 
Given the significant changes to itemized deductions, we believe a key consideration for itemizing will be charitable contributions. Let’s look at various ways to make charitable contributions.

Year-end tax planningFirst, filers need to make charitable donations by year-end. Contributions are deductible in the year they were made. Therefore, donations charged to a credit card before the end of 2019 count for 2019. This is true even if the credit card bill isn’t paid until 2020. Also, checks count for 2019 as long as they are mailed in 2019.

Consider gifting appreciated securities instead of cash, since gifting cash is very tax-inefficient. Gifting stock with a fair market value of $5,000 with a cost of $1,000 could save $952 in tax ($4,000 X 23.8%); plus, your client still receives a charitable contribution deduction. The top marginal tax bracket’s federal long-term capital gain rate is 23.8%.

Advanced charitable planning: Qualified charitable distribution

If retirees find themselves no longer good candidates to itemize deductions and are charitably inclined, they may consider a qualified charitable distribution (QCD). A QCD allows a tax-free transfer of up to $100,000 directly from an IRA custodian to a qualifying charity. The taxpayer must be age 70½ at the time of the distribution to be eligible. Also, a QCD must be done by December 31, 2019 to count for the current tax year.

When a taxpayer elects to make a required minimum distribution (RMD) a QCD, the taxpayer does not pick up the RMD as income, but also does not take the charitable contribution deduction. If your client is not planning to itemize, a QCD can be a tax-smart idea.

Donating the RMD to charity should reduce both adjusted gross income (AGI) and taxable income. Reducing income can produce potential tax benefits such as:

  • Reduced taxable Social Security benefits. 
  • If AGI falls below $250,000 for married filing jointly (MFJ) or $200,000 for single filers, investment income will no longer be subject to the 3.8% Net Investment Income Tax.
  • Future Medicare premiums could be reduced.

The “lump and clump” strategy

As mentioned above, taxpayers who used to itemize may not be doing so unless they engage in some proactive planning before year-end. Here is an example:

Mr. and Mrs. Smith, ages 55 and 54 respectively, have the following 2019 projected itemized deductions:

Itemized Deductions Projected

That’s less than the standard deduction of $24,400, so the Smiths will not itemize.
What can the Smiths do? One strategy is known as the “lump and clump.” Instead of gifting $2,500 to charity in 2019, why not consider “lumping” four years of charitable donations in 2019. Then “clump” those donations into a donor-advised fund.

Itemized Deductions Projected with Lump and Clump

That’s more than the standard deduction of $24,400, so the Smiths will itemize and get the full benefit of their charitable contributions.

If the Smiths don’t want to dispense $10,000 of charitable contributions in one year, what alternatives do they have? They could “clump” the $10,000 in contributions into a donor-advised fund (DAF). The Smiths will receive an immediate tax deduction for the contribution to the DAF. In the future, the Smiths can decide what charities will benefit, but in the meantime, the monies can be invested. A final note: many DAFs accept appreciated securities but will sell them once contributed with no tax bill back to the Smiths.

To me, most advisors don’t get credit for investment performance plus or minus a specific benchmark.  However, when an advisor shows a strategy to reduce taxes paid (in real dollars) the client always remembers.  It is time to talk taxes – and consider ways to reduce them for your clients.

Legal Note

Please note that charitable substantiation requirements apply per IRA pub 1771: “A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization.”
The donor must get the acknowledgement by the earlier of the date the donor files the original return for the year the contribution is made, or the due date, including extensions, for filing the return.
Charitable Deduction Limitations – Adjusted gross income (AGI) limitations on annual charitable deductions can defeat current deduction of the charitable contribution of IRA distribution proceeds (carryovers to a limited number of future tax years is available).
Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company (SEI). Investing involves risk, including possible loss of principal. Any applicable state and local taxes are not considered in the above discussion.
Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.


Legal Note

Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company. The content is for educational purposes only and is not meant to provide investment advice or as a guarantee of any specific outcome. While SEI welcomes comments, SEI is not responsible for, and does not endorse, the opinions, advice, or recommendations posted by third parties. The opinions expressed in comments are the view(s) of the commenter(s), and do not represent the views of SEI or its affiliates. SEI reserves the right to remove any content posted by users of this site in its sole discretion.

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