As the seasons change and we’re into the fall and winter months, it might seem odd to think about next year’s taxes.
However, now is a good time to review your financial situation before the books close on the year, and take steps to hopefully avoid a large tax burden. It’s also a good time to consider possible year-end gifting strategies.
While tax implications shouldn’t be the primary driver of any investment decision, they are an important factor to keep in mind. You’ll be carefully considering the purchase or sale of stocks to help offset capital gains and/or losses on the year. Just as importantly, gifts to charity can also have a positive impact on your current tax position. But, rather than pulling out your checkbook and donating to your local charity, consider gifting stock. Assuming that you’re selling long-term appreciated shares, you’ll likely get to take a deduction for the full fair market value of the shares, but you'll avoid a tax on the long-term capital gain (and be giving away a buried income tax liability that the charity won’t have to worry about when it sells back the stock).
As of 2015, you also have the option of reducing your taxable estate by gifting up to $14,000 per year (for single, $28,000 per year for a couple) without any tax ramifications to you or the recipient(s). This allows the beneficiary to benefit from the gift much sooner than if the inheritance was tied up in your estate until death. But you need to be sure the gift is transferred with enough time for all transactions to be completed prior to December 31.
Other gifting strategies to consider are the Charitable Remainder Trust (CRT), Charitable Lead Trust and Donor Advised Fund. CRTs can be structured to provide a payment stream to you during your lifetime and to distribute the trust assets to charity at a later date. It’s a tax exempt, irrevocable trust funded with contributions of cash and/or other appreciated assets. A charitable lead trust is a taxable, irrevocable trust that provides one or more charities with a payment stream during the term of the trust, and then distributes the assets to you or your beneficiaries. A donor advised fund is a more hands-on approach. These are established at community foundations or other charitable organizations, and the money grows tax-free in the fund until such time as you make grant recommendations or select a charitable recipient.
It’s important to talk with a financial professional to make sure your portfolio is on track with your goals, and to investigate possible tax-saving strategies (including gifting) before the end of the year.