Wealth Management Year-End Planning Executive Summary As we approach the end of, it is time to review traditional year-end planning decisions. We are aware of the significant changes in the tax code currently being negotiated, many of which could affect the planning strategies we discuss here. This Year-End Planning Guide provides information on current tax rates as well as strategies for saving, gifting and taking gains/losses to help reduce your tax exposure in. Topics covered are: Tax Rates Capital Gains/Losses Favorable tax rates on capital gains and qualified dividends Netting capital gains & losses Important trading days & wash sales Specific identification when selling shares Gifting Gift tax rules & exceptions Considerations with gifting appreciated securities to charity Qualified charitable distributions Retirement Savings Contribution limits Roth IRA conversions Required minimum distributions Income Tax Rates Ordinary income, qualified dividend and long-term capital gains tax rates for most taxpayers remain relatively unchanged from last year. The tax brackets for individuals, estates and trusts are listed below. Ordinary Income Tax Rates Tax Rate (1) Single Married Filing Jointly Trusts & Estates 10% $0 - $9,325 $0 - $18,650 N/A 15% $9,326 - $37,950 $18,651 - $75,900 $0 - $2,550 25% $37,951 - $91,900 $75,901 - $153,100 $2,551 - $6,000 28% $91,901 - $191,650 $153,101 - $233,350 $6,001 - $9,150 33% $191,651 - $416,700 $233,351 - $416,700 $9,151 - $12,500 35% $416,701 - $418,400 $416,701 - $470,700 N/A 39.6% $418,401+ $470,701+ $12,501+ (1) Does not include the 0.9% Medicare surcharge on earned income or the 3.8% Medicare surcharge on unearned income, where applicable. Long-Term Capital Gain & Qualified Dividend Tax Rates Tax Rate (1) Medicare Tax Total (1) Single Married Filing Jointly 0% 0% 0% $0 $37,950 $0 $75,900 15% 0% 15% $37,951 $200,000 $75,901 $250,000 15% 3.8% 18.8% $200,001 $418,400 $250,001 $470,700 20% 3.8% 23.8% $418,401+ $470,701+ (1) 3.8% Medicare surcharge will apply at AGI thresholds (not taxable income thresholds) of $200,000 and $250,000. Page 1
Capital Gains & Losses The long-term capital gain tax rate is: 0% for taxpayers in marginal tax brackets of 15% or less 15% for taxpayers in marginal tax brackets greater than 15% and less than 39.6% 20% for taxpayers in the 39.6% marginal bracket In, the 0% tax rate applies if your taxable income, including capital gains, is less than $37,951 for single taxpayers and less than $75,901 for taxpayers filing joint tax returns. The same tax rates also apply to qualified dividends as long as you do not elect to treat qualified dividends as investment income subject to ordinary income tax rates for purposes of determining the amount of deductible investment interest expense. Don t forget about the kiddie tax. Generally, dependent children under age 19 and dependent college students under age 24 will have their unearned income (interest, dividends, capital gains, etc.) in excess of $2,100 for taxed at their parents marginal tax rate. Be careful if gifting stock to children in an attempt to take advantage of the lower capital gain rates. Long-term status is obtained when a stock or bond is held more than 12 months (i.e., one year and one day). The holding period for a security purchased on an exchange begins the day after the trade date. The date of sale is part of the holding period. When a client inherits property, the long-term holding period is generally considered to be met immediately. Therefore, a disposition of the inherited property in less than 12 months should receive the favorable longterm capital gain treatment. Lock in Capital Losses but Know the Capital Gain and Loss Netting Rules The general rule is that taxpayers can deduct capital losses only to the extent they have capital gains; additionally, they can use capital losses to offset up to $3,000 of ordinary income (e.g., wages, interest, retirement plan distributions). Any capital losses not utilized in the current year can be carried forward until the taxpayer s death. There are two levels of netting gains and losses. See the chart below for netting process: Short-Term Capital Gains Short-Term Capital Losses Long-Term Capital Gains Long-Term Capital Losses Net Short-Term Capital Gain/(loss) Net Long-Term Capital Gain/(loss) Result Long-Term & Short-Term Gain Net Long-Term Gain Net Short-Term Gain Long-Term & Short-Term Loss Net Long-Term Loss Net Short-Term Loss Tax Treatment LTCG at LTCG rate and STCG at ordinary rate LTCG rate Ordinary rate Up to $3,000 can be used to offset ordinary income Up to $3,000 can be used to offset ordinary income Up to $3,000 can be used to offset ordinary income Note: The IRS deems many investments in precious metals via exchange traded funds as investments in collectibles. Therefore, long-term capital gains from the sale of these ETFs will be subject to the long-term capital gains tax rate of 28% for taxpayers in the 28%, 33%, 35% and 39.6% tax brackets. Page 2
The Last Day to Sell a Stock and Still Report the Gain or Loss in May Vary When determining the year a stock is sold, the trade date controls the transaction. Therefore, the last day to sell a stock in and still have it reported on a income tax return is Friday, December 29th. However, different rules apply if you re closing a short sale. Any loss generated from closing a short sale is treated as if it occurred on the settlement date and not the trade date. In order for a short sale to settle by December 29, the transaction should be closed no later than Wednesday, December 27,. Remember the Wash Sale Rules A wash sale occurs if a stock is sold at a loss and a substantially identical security is purchased within 30 calendar days before or after the sale. The wash sale period for any sale at a loss consists of 61 days: the day of the sale, the 30 days before the sale and the 30 days after the sale (these are calendar days, not trading days). If you sell a stock at a gain, the wash sale rules are irrelevant. Wash Sale Period for a Loss Trade Beginning: November 11, Trade Date: December 11, Ending: January 10, 2018 If a wash sale occurs, the taxpayer will not be allowed to claim the loss, the disallowed loss is added to the basis of the replacement stock, and the holding period for the replacement stock includes the holding period of the stock that was sold. A wash sale is also triggered if you sell a stock at a loss in a taxable account and repurchase the same stock in a retirement account. There is often a lot of confusion about the wash sale rules and options. The wash sale rules should apply if an option to buy substantially identical stock is acquired within the 61 day period. Options to buy include calls, rights, warrants and employee stock options. Writing puts or calls does not necessarily trigger the wash sale rules. However, the wash sale rules will ultimately be triggered if the writer of the put or call reacquires the stock via the transaction during the wash sale period. Selling stock at a loss and repurchasing an ETF that tracks a similar industry should avoid the wash sale rules. Selling an ETF that tracks the S&P 500 and repurchasing an ETF from a different fund company that also tracks the S&P 500 may avoid the wash sale rules. The IRS has offered little guidance in this area and many tax professionals have varying opinions which are described below. Just because the investment objective of two ETFs is nearly the same does not automatically make the funds substantially identical and subject to the wash sale rules. As an example, many tax professionals feel S&P 500 ETFs from different fund companies are not substantially identical since they are issued by different companies, have different management teams and may have different underlying fees and holdings. Other tax professionals believe the wash sales rules would apply especially if the underlying ETF holdings or fund construction were nearly identical between the two ETFs. Just to repeat, if you sell a stock at a gain, the wash sale rules are irrelevant. Consider Specific Identification When Selling Shares If a client decides to sell some (but not all) shares in a stock that were acquired at different times and prices, he or she may identify which shares should be sold. Identifying shares to sell with a particular basis or holding period affects how the gains or losses will be reported on his or her income tax return. If a client doesn t specify which shares to sell, the client is deemed to have sold shares based on the account s default method of accounting (FIFO for most). Page 3
In order to utilize the specific identification method, the IRS requires two things: (1) the taxpayer must communicate which shares to sell at the same time of the transaction and (2) the broker must confirm that communication in writing within a reasonable time. The client must then keep the documentation to support the transaction in the event of an audit. Gifting Remember the Gift Tax Rules When Making Family Gifts For, the first $14,000 of gifts made by a donor to each donee are not considered taxable gifts. Spouses who consent to split their gifts may transfer a total of $28,000 per donee in free of gift and generation skipping transfer tax. Couples electing to split their gifts should file gift tax returns. Because Congress increased the lifetime gift exemption amount from $5.45 Million to $5.49 Million, taxpayers may be able to make much larger gifts in that won t be subject to gift taxes. The basis and holding period rules can get quite confusing when dealing with gifted property so be sure to understand the tax ramifications of gifting property or securities. Cash is often the best and easiest form of gift. For recipients of appreciated property or securities (i.e., not cash), the donor s original holding period and basis will typically carry over. If the fair market value of gifted property is less than the donor s basis, the recipient s basis will depend on whether the property is ultimately sold for a gain or loss: The recipient s basis for figuring gain is the same as the donor s adjusted basis. The holding period began when donor originally acquired the property. The recipient s basis for figuring loss is the property s fair market value on the date of the gift. The holding period began on the day after the date of gift. If the recipient uses the donor s original basis for figuring a gain and gets a loss, and then uses the fair market value on the date of the gift and gets a gain, the recipient has neither gain nor loss on the sale. Don t Forget the Gift Tax Exception for Education If you paid elementary, high school or college tuition expenses on behalf of someone, those payments may not be subject to the annual gift tax limit. Tuition payments made directly to the school do not count toward the annual gift tax exclusion of $14,000 for. The payments may not be made to anyone other than the school in order to meet this exception to the rule. Please note that contributions to 529 Plans do not qualify for the gift tax exclusion and will count toward your annual gift tax exclusion limit of $14,000. Gifting to Charity When making gifts to charity, carefully consider which assets to give. If a contribution is over $250, you generally need a receipt from the organization. If a non-cash contribution is over $5,000, an appraisal might be necessary. Gifts of long-term appreciated stock from a taxable account are ideal because the donor receives an income tax deduction equal to the fair market value of the stock on the date of the gift and capital gain taxes will not be owed on the appreciation. Be careful when gifting securities subject to ordinary income (e.g., short-term capital gains, MLPs subject to ordinary income recapture, etc.). The donor s charitable deduction will be reduced by the amount of ordinary income that would have been owed had the security been sold. For gifts of cash to charity, gifts made via check or credit card are deductible if the check is mailed or the charge posts by December 31. Charitable contributions not deductible in can be carried forward for up to five years. Page 4
Percentage of AGI a donor can deduct Organization Type Cash Gifts Long-Term Capital Gain Property 1 Tangible Personal Property 2 Public Charity (including donor advised funds) 50% 30% using fair market value of the asset contributed 30% using fair market value of the asset contributed Private Foundation 30% 20% using fair market value if the asset contributed is publicly traded stock 20% using tax cost/basis of the asset contributed 3 1 Long-term property is property held more than one year. Short-term property, held one year or less, is subject to different limits. 2 If it will be used by the charity in conducting its exempt functions (e.g. art in a museum). Different limits apply for tangible personal property that will not be used by the charity in conducting its exempt functions. 3 If the fair market value of unrelated use property is lower than the tax cost/basis (depreciated asset). the allowed deduction will be limited to the fair market value. Source: Table information is from irs.gov, unless otherwise specified. Qualified Charitable Distributions are Available in and Beyond The ability to make qualified charitable distributions from an IRA has been extended for and beyond. Individuals over age 70½ are able to make a charitable distribution from an IRA directly to charity and exclude up to $100,000 from gross income. Retirement Savings IRA Contributions & Distributions The deadline for contributing to an IRA or Roth IRA for is April 17, 2018. Taxpayers age 70½ or older in will be subject to Required Minimum Distributions (RMDs). Generally, RMDs are required to be withdrawn by December 31, but a special rule allows those who reach age 70½ in to wait until April 1, 2018 to take their first RMD. Be aware, however, that delaying their RMD will require two RMDs in 2018 one for (due by April 1, 2018) and one for 2018 (due by December 31, 2018). Roth IRA Conversion Rules Still Relaxed in and Beyond Investors may still convert all or a portion of their traditional IRA into a Roth IRA regardless of income level. Upon conversion, the IRA owner must treat earnings and pre-tax contributions as taxable ordinary income (however, any after-tax contributions will not be treated as income) and pay an immediate tax. Roth IRAs allow investors to avoid paying taxes on the earnings when the money is withdrawn if the account has been open for 5 years. Unlike traditional IRAs, investors are not required to take minimum distributions from a Roth IRA at age 70½. When inheriting a traditional IRA, beneficiaries may pay estate taxes and withdrawals are subject to income taxes. With a Roth IRA, heirs may owe estate taxes, but the distributions are not subject to income tax. Beneficiaries of Roth IRAs must receive post-death required distributions just like they would when inheriting a traditional IRA. If you convert to a Roth IRA and change your mind, the IRS allows you to re-characterize the conversion. This essentially undoes the conversion. The re-characterization must be made by the extended due date of your return (for individuals that date is October 15, 2018). Required Minimum Distributions from IRAs and 401(k)s Must be Taken Separately The required minimum distribution rules are not new in. However, there is a quirk in the rule when a taxpayer has reached age 70½, must begin taking RMDs, and has both an IRA and a 401(k): An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Page 5
Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts. If a 401(k) participant is over 70½ and decides to retire but has not previously been subject to RMDs, they must take their RMD from the 401(k) before rolling their 401(k) to an IRA. 2018: Things to Consider While there are still many uncertainties surrounding the potential tax changes for 2018, it is prudent to plan ahead and review financial goals to position yourself for the year to come. Some important things to discuss are: Current asset allocation and how it aligns with your long-term objectives Establishing a retirement account and which option(s) fit your needs Maximizing employer-sponsored retirement plan contributions and take advantage of matching funds Large cash balances (especially in excess of FDIC limits) and putting your money to work Reviewing beneficiary designations and making adjustments, if necessary Social Security filing options if you are approaching age 62/66 or planning to retire soon Gifting preferences and implementing a plan for annual gifts Strategies for deferring income to take advantage of potentially lower tax rates, including employer deferred compensation plan elections and when to exercise stock options Avoiding tax liabilities and penalties by reviewing payroll withholding elections and making accurate quarterly payments, if necessary Reviewing estate planning documents and making sure they are up-to-date Stephens Inc., Member NYSE, SIPC Sources for data: Internal Revenue Service, U.S. Government Printing Office, and Forefield Advisors This summary has been prepared solely for informative purposes, is not tax advice, and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. The information is obtained from sources which we consider reliable but we have not independently verified such information and we do not guarantee that it is accurate or complete. Tax laws are complex and subject to change. Stephens Inc. and its representatives do not provide legal, tax, or accounting advice. Due to the fact that each individual s tax situation may vary, This summary is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. Page 6