Midyear Tax Planning Ideas for Individuals

Midyear Tax Planning Ideas for Individuals article image

The summer months are a good time to consider some ideas that will help cut your tax bill for the current year and minimize future taxes.

Gift Taxable Investments vs. Cash

Are you feeling generous? As you review your investment accounts for winners and losers, consider the optimal type of gifts to give your favorite relatives and/or charities.

Gifts to relatives. Instead of making cash gifts, give your loved ones taxable investments that have appreciated in value. If your relatives are in lower federal tax brackets, they’ll pay lower tax rates than you’d pay if you sold the same shares.

For example, relatives in the 0% federal income tax bracket for long-term capital gains and qualified dividends will pay a 0% federal tax rate on gains from shares that were held for over a year before being sold. (For purposes of meeting the more-than-one-year rule for gifted shares, you can count your ownership period plus the gift recipient’s ownership period.)

Even if the appreciated shares have been held for a year or less before being sold, your relative will probably pay a much lower tax rate on the gain than you would.

For taxable investments that are currently worth less than what you paid for them, sell the shares and claim the resulting capital loss yourself. Then, you can give the cash proceeds to your relative.

Gifts to charities. Similar principles apply to donations to IRS-approved charities. Donate shares that have appreciated in value, instead of giving away cash. Why? Donations of investments that you’ve owned over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift (assuming you itemize deductions, rather than taking the standard deduction).

Plus, when you donate appreciated shares, you escape any built-in capital gains taxes. That’s a double tax saver. First, you avoid capital gains taxes. Second, if you itemize deductions, you get a tax-saving charitable deduction. Meanwhile, the tax-exempt charitable organization can sell the donated shares without owing anything to the IRS.

For taxable investments that are currently worth less than what you paid for them, sell the shares and claim the resulting capital loss yourself. Then you can give the proceeds to your favorite charity and claim a resulting tax-saving charitable deduction (assuming you itemize deductions).

Consider an IRA Conversion

Should you convert a traditional IRA into a Roth IRA? This strategy makes sense if you expect that, during your retirement years, you’ll be in your current tax bracket or a higher one. The current tax hit from a conversion done this year may turn out to be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s earnings.

There is no income limit imposed on Roth conversions. Even billionaires can do them! Your tax advisor can help you evaluate the wisdom of the Roth conversion idea.

Ready, Set, Plan

These are just a few ideas for reducing future taxes and avoiding unpleasant surprises next spring. To benefit from midyear tax planning, consult your tax advisors now. If you wait until the end of the year, it may be too late to take advantage of certain tax planning strategies.

PKS & Company, P.A., Certified Public Accountants, a full service accounting firm with offices in Salisbury, Ocean City, MD and Lewes, DE. PKS provides traditional accounting services as well as specialized services in the areas of retirement plan audits and administration, medical practice consulting, estate and trust services, fraud and forensic services and payroll services and offers financial planning and investments through PKS Investment Advisors, LLC. Visit www.pkscpa.com or call 1-800-274-2564.