- Don’t Forget Year-End Gifts, Etc.
- December 28, 2015 | Authors: Thomas N. Lawson; Alan J. Tarr
- Law Firms: Loeb & Loeb LLP - Los Angeles Office ; Loeb & Loeb LLP - New York Office
A variety of planning steps should be considered before the end of the year. One of these is to make any $14,000 annual exclusion gifts you wish to make. This annual exclusion amount does not carry forward to the next year if you do not use it, so in order to take maximum advantage of the exclusion, one needs to make these gifts each year. Also remember you can make them to an unlimited number of individuals and their spouses, each of whom have their own $14,000 exclusion amount.
Taxpayers who have realized capital gain income, particularly short-term capital gain income, should go through their portfolios to see if they have any unrealized losses they want to harvest before the end of the year. If you sell a stock at a loss and buy the same stock within 30 days before or after the sale, your loss will be disallowed under what is referred to as the “wash sale” rule.
It is also a good idea to consider whether items that are tax deductible, such as charitable contributions and state income taxes, should be paid before the end of the year. The alternative minimum tax makes this planning complex. Many itemized deductions, including the deduction for state income taxes, are not allowed for purposes of computing the alternative minimum tax. These deductions should be deferred where possible if you will be paying the alternative minimum tax. Other deductions, including the charitable contribution deduction, are allowed against alternative minimum taxable income as well as against regular taxable income.
If you make a charitable contribution in a year when you are paying alternative minimum tax, the deduction will not be as valuable as it would be if you made the contribution in a year in which you were not paying the alternative minimum tax. Many taxpayers pay alternative minimum tax virtually every year and have no choice. This is often the case for taxpayers who reside in states like California and New York that have very high state income tax rates. Remember that you can increase the benefit of the charitable contribution deduction by making a charitable gift of highly appreciated capital assets, such as stocks. You can deduct the fair market value without recognizing the unrealized tax gain, so you receive a form of double benefit. If you are contributing to your own private foundation, this gift should be discussed with your tax advisor.
If you have unusually high income this year, you should evaluate whether it will be beneficial to pay your state income tax on that income during 2015 rather than early in 2016. You may be able to pay more state income tax before reaching alternative minimum tax in a higher income year. You may derive a greater benefit from charitable contributions in a year when your income is unusually high. Of course, higher income will also mean that more of your itemized deductions are subject to the itemized deduction phase-out, so projections are required. It is a good idea to review all of these matters with your accounting advisor.
If you have not yet taken your required minimum distribution (RMD) from your IRA and you are philanthropic, consider a direct distribution from your IRA to a public charity. Under the law in effect in prior years, a donor age 70½ or older could direct a payment from his IRA to a qualified charity. This law keeps expiring and Congress keeps extending it. Although the taxpayer does not get a charitable contribution deduction, he is also not taxed on the RMD (up to $100,000), so this is particularly useful if the taxpayer will not be able to use the deduction under the alternative minimum tax rules just described. In 2014, Congress extended this law in December, far too late for most taxpayers. The House passed a permanent extension in the Spring. The Senate Finance Committee reported out an extension retroactively for all of 2015 and prospectively for 2016, but the Senate has not voted as of the date of this newsletter. Worst case, if you direct the RMD to charity and the special rule is not extended, it will be a distribution to you and a charitable contribution by you.