Year-end planning to reduce tax owed next April 15 shouldn’t be left solely to certified public accountants.
“I have developed a technique dubbed the ‘summit meeting,’” says Charles L. Nemes, senior vice president of investments at Nemes Rush Private Wealth Management of Raymond James in Novi, Mich.
“I invite the CPA, the estate attorney and the client(s) to my office for a lunch meeting. After getting the cIient’s permission, I ask for the client’s information and put together a master agenda,” Nemes says.
“I usually have these meetings every other year for my top 25 clients, from mid-October to late November,” he says.
Tax planning tactics arising from these sessions include gifting appreciated securities to charity to eliminate the capital gains tax and offsetting capital gains with capital losses, Nemes says.
“I’ve yet to host one of these meetings where the client didn’t thank me multiple times for arranging the event,” he says.
Gain from Losses
Taking capital losses late in the year also is mentioned by Maria Pisa, a financial advisor with Edward Jones in Calabasas, Calif.
“Comb through each asset for performance and tax losses, and offset any gains with losses, as needed,” she says. “This can serve diversification purposes and help portfolios stay on track during good times and those not so good.”
Each calendar year, realized capital losses can negate the tax on realized gains, while excess losses can be deducted, up to $3,000. Unused losses can be carried over to future years.
Asking the CPA about a client’s tax bracket for the current calendar year can be very helpful when considering a Roth conversion or an individual retirement account distribution prior to 70 1/2, when required distributions begin, Nemes says.
“A conversion or distribution might be taxed at 10% or 15%, even though the tax was deferred when the client was in the 39.6% bracket,” he says. “Many clients in their retirement years have negative taxable income [their itemized deductions and exemptions exceed taxable income] while having IRAs and qualified plan balances that could be distributed tax-free.”
David Upin and Dave Sieben, advisors with the Upin Sieben Group of RBC Wealth Management in Minneapolis, suggest maxing out all eligible tax-deferred contributions by the end of the year.
“Don’t overthink this. Clients should contribute as much as possible to a 401(k) or similar plans,” Upin says.
“This action may reduce 2015 taxable income and allow tax-deferred investment growth in future years,” he says. “Do not wait until next week, next month or next year to contribute; do it now.”
Sieben also recommends checking on a mutual fund’s potential capital gains exposure to avoid a big unexpected tax bill at the end of the year from a mutual fund that isn’t meeting expectations.
“If appropriate, consider an alternative investment such as a tax-efficient [exchange-traded fund] before potential capital gains are distributed,” he says.
Donald Jay Korn is a New York-based financial writer who contributes to On Wall Street and Financial Planning.
This story is part of a 30-day series on tax planning strategies.