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Posted on DEC 6, 2016

Year-end tax strategies to update your financial and estate plans

Article by Tracy Dalton, CPA, JD, LLM | Vice President Wealth Fiduciary Services Manager, Johnson Bank and Peter Schumacher, CPA | Vice President Wealth Advisor, Cleary Gull Advisors, a Johnson Financial Group Company

Year end is an important time to reflect on both the current year and your long‐term financial goals. To that end, we want to share annual year‐end tax and financial planning suggestions that look at both the current year and the broader plan.

The elephant in the room of course is the recent election outcome. With a new president slated to be sworn in whose campaign rhetoric suggested lower taxes for both individuals and corporations, we would be remiss to not address what this may mean. While there are no concrete proposals yet, President‐Elect Trump's published platform suggests he will seek to reduce the number of tax brackets to three – 12%, 25%, and 33% – and cap itemized deductions at $100,000 for individuals and $200,000 for couples. Plus, the President‐Elect has proposed eliminating the Affordable Care Act (ACA), commonly referred to as Obamacare, and its 3.8% surtax on net investment income for high income tax payers. For many of our clients, deferring income into 2017 and accelerating some deductions into 2016 may be smart, especially for those in the highest brackets.

Beyond the election, our 2016 suggestions fall into these broad categories:

  • Consider your thresholds
  • Manage your income and deductions
  • Tidy up your finances
  • Review your estate plan

Consider Your Thresholds

The first place to start is to take a look at projected income this year and next. Depending on the timing of stock or asset sales or bonuses, there can be significant variation from one year to the next. We often assume we know what our tax bracket is, but you may be surprised how changes in income and/or deductions can move you from one bracket to another. So a starting point for all tax planning is to know your marginal tax bracket by adding up your income from all sources to determine whether you may be in a higher or lower bracket than you thought. You should also look at thresholds for phase‐outs or limitations on certain deductions, tax credits or exemptions. The 3.8% surcharge on net investment income as part of the ACA kicks in at a different level based on adjusted gross income (AGI). If you're above that level, based on your tax filing status, you might make efforts to lower your AGI or reduce the income items (dividends, capital gains, annuities and rental income) subject to the additional tax.

It is a good idea to estimate these thresholds before the end of the year, especially if you are in a lower bracket than you thought and have room to accelerate income into the current year. You may find that your income prevents you from taking all of your deductions, in which case you may want to defer some deductions for later when you can take full advantage of them.

Manage Your Income and Deductions

Knowing your thresholds may inspire you to take steps to lower your income in 2016 or defer income into 2017.

Steps to lower income in 2016:

  • Maximize contributions to 401(k) retirement accounts. In 2016, you can contribute up to $18,000 ($24,000 if you are 50 or older).
  • Maximize Health Savings Account Contributions. For 2016, the limits are $3,350 for individuals and $6,750 for families (If the HSA holder is 55 or older the limits are increased to $4,350 for individuals and $7,650 for a family).
  • Make your January mortgage payment before the end of December to add to your mortgage interest deduction.
  • Make charitable contributions prior to December 31 if itemizing deductions.
  • Defer income such as bonuses into 2017.
  • Harvest losses by selling stocks or other assets at a loss so you can offset gains. Keep in mind that the wash sale rule prevents you from repurchasing substantially identical assets within 30 days.

Some retirees or people without earned income in a given year may find themselves in a much lower bracket. This can be an opportunity to shift income into the current year to take advantage of the lower bracket. The caveat is to only shift enough income to use up the bracket. Be careful not to move too much income into the current year that you land in the next bracket. Here are a few strategies to increase income.

Steps to increase income in 2016:

  • Take bonuses or move other income into 2016.
  • Sell appreciated assets and take gains this year.
  • Convert an IRA into a Roth. Income tax is due on the converted amount, but future earnings and distributions from a Roth are tax free.
  • Similarly, one could fund a Roth IRA versus placing retirement funds into a 401k or other retirement account that allow you to defer income.
  • Wait to make a charitable contribution until after January 1.
  • Defer other itemized deductions into 2017. For example, wait to pay your property taxes until January.

Beyond shifting income from one year to another, parents with custodial accounts that may have gains could look at taking those gains and investing the proceeds in like investments. Note that the so‐called “kiddie tax” kicks in on investment income greater than $1,900.

Some taxpayers may employ a strategy to maximize deductions in alternate years. Taxpayers may take a standard deduction ($12,600 for couples filing jointly or $6,300 for individuals), or they may itemize deductions, but not both. Some taxpayers may find that in any given year they do not have enough qualifying deductions to exceed the standard deduction. In that case, it may make sense to bundle deductions in alternate years. However, President‐Elect Trump's platform includes creating a much higher standard deduction which could affect this strategy.

Tidy Up Your Finances

Each year, we encourage clients to do a general review of their finances in order to “tidy up.” This includes reviewing your year‐to‐date withholdings or estimated tax payments against your projected tax liability. Some may need to make an extra payment at year end to avoid an underpayment penalty. Others may find the need to adjust withholding for the coming year.

More broadly, year‐end is a good time to review your financial plan. Start by looking at your overall asset allocation to see if you remain in line with the targeted asset allocation you've identified. Consider your savings and look at your retirement plan elections. Are you saving up to the maximum limits in your workplace retirement plan or could you increase the amount of income set aside in your 401k? Is your saving on pace to meet your goals? If not, could you set aside additional savings in a traditional or Roth IRA?

For those who are 70 ½ or older, make sure to take any required minimum distributions. For those with medical savings accounts or other flexible savings plans at work, make sure you use up any money set aside, if required. Once a year you may want to place key documents in a safe deposit box.

Review Your Estate Plan

An annual best practice is to review estate planning documents and beneficiaries on all relevant accounts or policies. Retirement accounts and life insurance policies generally allow you to name a beneficiary. Most people name a spouse or children as beneficiaries on these accounts and in their will. However, problems arise if a couple divorces and fails to remove the ex‐spouse as a beneficiary, if a named beneficiary dies, or if a couple has additional children and fails to add them to existing accounts where other children are named beneficiaries.

The holidays are an excellent time to consider financial gifts to reduce the size of your estate. Many individuals use the annual gift exclusion – $14,000 per person/$28,000 couple – to make tax‐free gifts to children or family members or others. It can be especially rewarding to watch your children benefit from these gifts during your lifetime. The lifetime estate tax exclusion is currently $5.45 million per person or $10.9 million for a couple. While estate tax is generally not an issue for most people, the incoming Trump administration has also pledged to eliminate the estate tax, so these limits may change.

529 college savings plans also have an estate planning benefit. In addition to a deduction of annual contributions on some state income tax returns (subject to varying limits in each state), individuals can put $70,000 and couples can put $140,000 into a 529 plan in a given year and spread the gift over 5 years to avoid gift taxes. This rule is not subject to an income limitation.

Another strategy for wealthy individuals that has both tax and estate planning benefits is to make a tax‐free distribution to a charity of up to $100,000 from a traditional IRA. Couples filing jointly can give $200,000. This can only be done by individuals age 70 ½ or older and can count toward their annual required minimum distribution.


We recommend asking your financial advisor, tax advisor or estate planning counsel at least annually about any steps you can take to minimize taxes, update your financial plan, and stay on target to reach your financial goals.

Although we offer the above suggestions for you to discuss with your advisor, Johnson Bank and Cleary Gull Advisors does not provide tax or legal advice.