Q. Don’t you usually do a year-end column for potential tax savings? I’m particularly interested in the best way to gift some stock in my brokerage account. I’m not sure if I have time to get a certificate issued. I have some losers I’d like to get rid of, as well as some appreciated stock I could gift.
A. Thanks for asking about the column. Here it is. The following last-minute suggestions may lower your tax bill. I’ll address your gifting issue first.
Charitable donations actually made prior to year end are tax deductible. A pledge for future contributions doesn’t count as a deduction until the year they are completed.
If you are making a contribution with a check, make sure it is postmarked by December 31, 2015, and consider using a credit card to ensure a cash contribution is credited for this tax year.
If you are donating mutual funds or stocks that have appreciated, it is usually best to donate shares instead of cash. You don’t need to have a stock certificate to make the donation. Funds and stocks held in a brokerage account can easily be transferred to a charity. Your broker will probably have a “Charitable Gift Transfer Letter of Authorization.” To initiate the transfer you will need to get the following information from the charity: 1) name of the charity’s brokerage firm, 2) the charity’s brokerage account number, 3) the DTC number (Depository Trust Company) and 4) the charity’s account title/registration. Select the stock or mutual fund you wish to transfer and the number of shares that will equate to the amount of money you wish to donate.
Donating highly appreciated shares allows you to deduct the donated share’s fair market value, and neither you nor the charity will have to report any taxable gains.
If you have stocks or funds that you no longer wish to own that have declined in value it is best to sell these and donate the cash proceeds.
Sell losing stocks
Even if you have no plans to donate the cash proceeds to charity, selling losing stocks is a good year-end strategy called “loss harvesting.” The sale will generate a realized loss that will offset any realized gains dollar for dollar and up to $3,000 of taxable income each year.
Any unused losses can be carried forward for use in future tax years until they are depleted or until death. To use the losses, you must avoid a “wash sale.” A wash sale occurs when you buy the same security within 31 days after the sale of the security. If you want to repurchase the security, wait 31 days to do so or you will lose the tax advantage of the realized losses.
You are allowed to buy a similar type of security but not the exact same security. Example: if you sell an oil and gas master limited partnership that has lost value, you could immediately buy a different oil and gas master limited partnership that may have also suffered losses this year and not be in violation of the wash sale rule.
Gifting appreciated securities to those in a lower tax bracket is also a good strategy. If you have children or other loved ones to whom you normally give cash, consider gifting shares of appreciated securities instead. They will inherit your cost basis, but if they are in a lower tax bracket their capital gains tax rate could be much lower than yours. You can gift up to $14,000 to anyone ($28,000 if married and gift split) without filing a gift tax return.
If you are in or below the 15 percent tax bracket and have appreciated securities you want to keep in your portfolio, consider selling these and immediately buying them back. As long as the sale doesn’t place you in a tax bracket above 15 percent, your capital gains will be taxed at 0 percent. Your new cost basis will be the new purchase price.
Maximize your non-IRA retirement contributions by December 31. You have until April 18, 2016, to fund or set up and fund a new IRA and have the contribution count for 2015. This includes SEP-IRAs.
If you have a flexible spending account and haven’t used all of the money, you may need to use it before year end or lose it. Check to see if your employer adopted the grace period permitted by the IRS. If so, you may have until early 2016 to spend money set aside in 2015.
If you think you will be in a lower tax bracket in 2016 and you are able, defer income to next year (year-end bonuses, accounts receivable).
If you think you will be in the same or a lower tax bracket in 2016, consider paying deductible expenses such as property taxes due next year this year. Be aware of the alternative minimum tax (AMT) when accelerating deductions. Certain expenses are deductible under regular tax rules but not deductible under AMT.
A consultation with a tax professional is always a good idea.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624